/raid1/www/Hosts/bankrupt/TCREUR_Public/171214.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Thursday, December 14, 2017, Vol. 18, No. 248
Headlines
C R O A T I A
AGROKOR DD: Gov't-Appointed Management Files Compensation Claims
G E R M A N Y
AIR BERLIN: EU Okays Easyjet's Acquisition of Parts of Business
ALPHA GROUP: Moody's Assigns B2 Corporate Family Rating
APCOA PARKING: S&P Affirms 'B+' CCR on Dividend Recapitalization
PHOENIX SOLAR: Board Submits Insolvency Filing in Munich Court
I R E L A N D
ALPSTAR CLO 2: Moody's Hikes Class E Notes Rating to Ba2(sf)
IRISH BANK: Unsecured Creditors Set to Receive Second Dividend
OZLME III: Moody's Assigns (P)B2 Rating to Class F Senior Notes
I T A L Y
CREDITO VALTELLINESE: Fitch Cuts IDR to B-, on Watch Evolving
ILVA SPA: Plant Pollution Issues May Put Rescue Deal at Risk
L U X E M B O U R G
GLOBAL BLUE: Moody's Revises Outlook to Pos. & Affirms B1 CFR
PARK LUXCO 3: Moody's Revises Outlook to Neg. & Affirms B1 CFR
N E T H E R L A N D S
CDS HOLDCO III: Moody's Assigns B2 CFR, Outlook Negative
R U S S I A
ENERGO-PRO AS: Fitch Assigns 'BB' Long-Term Issuer Default Rating
U N I T E D K I N G D O M
AUBURN SECURITIES 4: Fitch Affirms BB+ Rating on Class E Notes
CARILLION PLC: Reaches Deal to Sell Part of UK Healthcare Unit
EUROSAIL 2006-1: S&P Affirms B-(sf) Rating on Class E Notes
EUROSAIL-UK 2007-1NC: S&P Ups Rating on Cl. D1a/D1c Notes to B
GRAINGER PLC: S&P Alters Outlook to Positive on Improved Coverage
HOUSE OF FRASER: Moody's Lowers CFR to Caa1, Outlook Negative
NEW LOOK: Moody's Lowers CFR to Caa2, Outlook Negative
SHOP DIRECT: Fitch Assigns Final 'B+' IDR, Outlook Stable
TAURUS 2017-2: Fitch Assigns BB Rating to Class E Notes
* UK: Non-Conforming RMBS 90+ Day Delinquencies Slightly Improve
*********
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C R O A T I A
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AGROKOR DD: Gov't-Appointed Management Files Compensation Claims
----------------------------------------------------------------
Misha Savic at Bloomberg News, citing Jutarnji List, reports that
Agrokor DD's government-appointed management has filed
compensation claims of HRK1.6 billion to State Attorney's Office
in Zagreb against former and current executives.
According to Bloomberg, the company seeks damages from 15 people,
including Agrokor founder Ivica Todoric and his two sons.
About Agrokor DD
Founded in 1976 and based in Zagreb, Crotia, Agrokor DD is the
biggest food producer and retailer in the Balkans, employing
almost 60,000 people across the region with annual revenue of
some HRK50 billion (US$7 billion).
On April 10, 2017, the Zagreb Commercial Court allowed the
initiation of the procedure for extraordinary administration over
Agrokor and some of its affiliated or subsidiary companies. This
comes on the heels of an April 7, 2017 proposal submitted by the
management board of Agrokor Group for the administration
proceedings for the Company pursuant to the Law of Extraordinary
Administration for Companies with Systemic Importance for the
Republic of Croatia.
Mr. Ante Ramljak was simultaneously appointed extraordinary
commissioner/trustee for Agrokor on April 10.
In May 2017, Agrokor dd, in close cooperation with its advisors,
established that as of March 31, 2017, it had total liabilities
of HRK40.409 billion. The company racked up debts during a rapid
expansion, notably in Croatia, Slovenia, Bosnia and Serbia, a
Reuters report noted.
On June 2, 2017, Moody's Investors Service downgraded Agrokor
D.D.'s corporate family rating (CFR) to Ca from Caa2 and the
probability of default rating (PDR) to D-PD from Ca-PD. The
outlook on the company's ratings remains negative. Moody's also
downgraded the senior unsecured rating assigned to the notes
issued by Agrokor due in 2019 and 2020 to C from Caa2. The
rating actions reflect Agrokor's decision not to pay the coupon
scheduled on May 1, 2017 on its EUR300 million notes due May 2019
at the end of the 30-day grace period. It also factors in Moody's
understanding that the company is not paying interest on any of
the debt in place prior to Agrokor's decision in April 2017 to
file for restructuring under Croatia's law for the Extraordinary
Administration for Companies with Systemic Importance.
On June 8, 2017, Agrokor's Agrarian Administration signed an
agreement on a financial arrangement agreement worth EUR480
million, including EUR80 million of loans granted to Agrokor by
domestic banks in April. In addition to this amount, additional
buffers are also provided with additional EUR50 million of
potential refinancing credit. The total loan arrangement amounts
to EUR1,060 million, of which a new debt totaling EUR530 million
and the remainder is intended to refinance old debt.
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G E R M A N Y
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AIR BERLIN: EU Okays Easyjet's Acquisition of Parts of Business
---------------------------------------------------------------
Rochelle Toplensky at The Financial Times reports that Brussels
has approved EasyJet's acquisition of parts of Air Berlin.
In October, the low-cost airline agreed to buy the insolvent
airline's passenger transport operations at Berlin Tegel airport,
including landing slots, the FT relates.
According to the FT, EU Competition Commissioner Margrethe
Vestager said: "Our job is to make sure that airline takeovers do
not result in less competition -- that would mean higher flight
fares and less choice for consumers. EasyJet's plans to buy
certain Air Berlin assets will not reduce competition and we have
approved it today. Our decision enables easyJet to grow its
presence at Berlin airports and start competing on new routes to
the benefit of consumers."
About Air Berlin
In operation since 1978, Air Berlin PLC & Co. Luftverkehrs KG is a
global airline carrier that is headquartered in Germany and is the
second largest airline in the country.
In 2016, Air Berlin operated 139 aircraft with flights to
destinations in Germany, Europe, and outside Europe, including the
United States, and provided passenger service to 28.9 million
passengers. Within the first seven months of 2017, the Debtor
carried approximately 13.8 million passengers. It employs
approximately 8,481 employees. Air Berlin is a member of the
Oneworld alliance, participating with other member airlines in
issuing tickets, code-share flights, mileage programs, and other
similar services.
Air Berlin has racked up losses of about EUR2 billion over the
past six years, and has net debt of EUR1.2 billion.
On Aug. 15, 2017, Air Berlin applied to the Local District Court
of Berlin-Charlottenburg, Insolvency Court for commencement of an
insolvency proceeding. On the same day, the German Court opened
preliminary insolvency proceedings permitting the Debtor to
proceed as a debtor-in-possession, appointed a preliminary
custodian to oversee the Debtor during the preliminary insolvency
proceedings, and prohibited any new, and stayed any pending,
enforcement actions against the Debtor's movable assets.
To seek recognition of the German proceedings, representatives of
Air Berlin filed a Chapter 15 petition (Bankr. S.D.N.Y. Case No.
17-12282) on Aug. 18, 2017. The Hon. Michael E. Wiles is the
case judge. Thomas Winkelmann and Frank Kebekus, as foreign
representatives, signed the petition. Madlyn Gleich Primoff,
Esq., at Freshfields Bruckhaus Deringer US LLP, is serving as
counsel in the U.S. case.
ALPHA GROUP: Moody's Assigns B2 Corporate Family Rating
-------------------------------------------------------
Moody's Investors Service assigned B2 corporate family rating,
B2-PD probability of default rating to Alpha Group Sarl ("A&O
Hotels & Hostels" or "A&O"). Moody's further assigned (P)B2 senior
secured facility ratings to its proposed Term Loan B and Revolving
Credit Facility currently being marketed. The outlook on all
ratings is stable. This is the first time Moody's has rated the
company.
"Moody's rating action balances A&O's resilient business, good
liquidity and solid asset backing with small size and material
leverage," said Maria Maslovsky, Moody's Vice President -- Senior
Analyst and the lead analyst for A&O Hotels & Hostels.
The instrument rating for A&O's proposed senior secured facility
is the same as the corporate family rating reflecting its position
as the only class of debt in the capital structure.
Moody's issues provisional ratings in advance of the final sale of
securities, and these ratings represent only Moody's preliminary
opinion on the transaction. Upon a conclusive review of the
transaction and associated documentation, Moody's will endeavor to
assign a definitive rating to the securities.
RATINGS RATIONALE
The corporate family rating of B2 reflects A&O's strong business
model with a low breakeven occupancy and a history of prudent and
profitable growth combined with good liquidity and freehold asset
protection in excess of face value of debt. The rating also takes
into account the company's relatively small size and high pro
forma leverage of 7.7x debt/EBITDA expected in 2018 (as adjusted
by Moody's).
A&O Hotels and Hostels is an operator of 34 hybrid hostel/hotel
properties in 22 cities across six countries with the majority of
the portfolio located in Germany. A&O's offer ranges from a bed in
a dormitory-style space for EUR7 per night to a room with private
bath similar to budget hotels for up to EUR45 per night.
Approximately half of the company's business is generated by
groups, many of which are German school students traveling as part
of their curriculum. A&O reports 97% retention of such customers
which makes its business profile very resilient. Owing to the
large group component, the company also benefits from superior
revenue visibility with close to 35% of its annual sales pre-
booked before 1 January. Also, the company reports that all of its
properties are profitable and that it had never had to close a
single asset over its twenty year history. A&O has been opening
two to three properties per year and according to the company its
breakeven occupancy is approximately 30% which is significantly
below peers. Still, A&O's overall occupancy is below that of peers
at only 54% reflecting the company's focus on growth as well as
the large size of its assets with over 700 beds per property on
average. The company is focused on costs with only four full-time
employees per property and reports strong adjusted EBITDA margins
of over 45%.
A&O owns eleven of the 34 assets which total EUR437 million in
freehold value according to an appraisal by Knight Frank performed
in October 2017. These assets are comprised of real estate in
gateway cities in Europe that attract tourism and are likely to
retain value both in their current and possible alternative uses.
The freehold valuation provides good credit protection as it
exceeds the proposed EUR300 million term loan as well as the total
senior secured credit facility including the EUR50 million
revolver which is not expected to be drawn.
These strengths are counterbalanced by A&O's small size with 2016
revenues of approximately EUR107 million and only 34 assets and
material leverage at close to 8.0x. In comparison to rated
European hotel peers, A&O's turnover is significantly lower and
its asset base reflects a fraction of the comparable universe with
other similar lodging companies operating hundreds of hotels.
Although ameliorated to some extent by the company's strong track
record including positive growth in 2009 when all segments of the
hotel industry were underperforming, A&O's small size leaves less
cushion for the company to withstand exogenous risks.
A&O's initial pro forma leverage is high at 7.7x debt/EBITDA
expected for 2018 as adjusted by Moody's. This calculation
includes the company's proposed EUR300 million Term loan B as well
as approximately EUR167 million attributable to the adjustment for
leased properties included by Moody's. The adjustment is
calculated as the present value of future lease commitments capped
at 10x the annual lease payment. Pro forma for the new facility,
A&O will also have approximately EUR90 million of shareholder
loans which Moody's assessed as equity subject to the review of
final documentation. The company anticipates funding a EUR30
million portfolio refurbishment program and an EUR8 million new
property rollout over the next two years. These amounts are
expected to be funded from cash flow; therefore, material near-
term deleveraging is not anticipated. Upon completion of the
improvements and expected increased average daily rate (ADR) and
occupancy as a result of the refurbishment, more cash flow will be
available for debt repayment.
A&O's liquidity is good with approximately EUR48 million of cash
expected to be on balance sheet upon closing coupled with a EUR50
million undrawn revolving credit facility and no near-term debt
maturities. Except for the expected capital expenditure in 2018
and 2019, the company is anticipated to generate positive free
cash flow (after capex and dividends, per Moody's definition).
The proposed senior secured credit facility consists of a six-year
EUR50 million revolver and a EUR300 million seven-year term loan.
The tranches are pari passu and secured by a first lien on all
material assets of the company including real estate. No
maintenance covenants are contemplated, but the facility will have
a springing covenant on the revolver if drawn over 40%. The use of
proceeds will include repaying existing property debt of
approximately EUR134 million, shareholder distribution of
approximately EUR123 million, cash on balance sheet of EUR35
million and transaction costs. Of the EUR123 million shareholder
distribution, EUR18 million is slated to repay a vendor loan in
2018 and EUR37 million will be used to purchase two properties to
be leased to A&O.
The stable rating outlook reflects Moody's expectation that A&O
will build on its track record of profitable and resilient
operations and prudent growth such that its leverage declines from
the current level of 8.1x pro forma in 2017 to below 8.0x over the
next 12-18 months while maintaining adequate liquidity.
Positive rating movement is unlikely in the near term and will
require the company to increase its scale and diversification
substantially while maintaining a successful track record of
overall growth, as well as outside its core German markets.
Quickly achieving occupancies above breakeven for the new assets
and strengthening overall portfolio occupancy would also be
needed. Further, Moody's would expect a sustained reduction in
leverage to below 6.0x and good liquidity.
Negative rating pressure could occur from any deterioration in
leverage from the current level of 8.1x pro forma in 2017, any
liquidity challenges or a failure to continue new development
rollout in a consistent and profitable fashion. Failure of the
final documentation to satisfy the requirements of Moody's
methodology with respect to equity credit for A&O's shareholder
loans would also be viewed negatively.
A&O Hotels and Hostels is one of the largest hostel chains in
Europe with 34 assets in 22 cities. Headquartered in Berlin, the
company reported revenues of EUR107 million in 2016.
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
APCOA PARKING: S&P Affirms 'B+' CCR on Dividend Recapitalization
----------------------------------------------------------------
S&P Global Ratings affirmed its 'B+' long-term corporate credit
rating on German car park operator APCOA Parking Holdings GmbH.
The outlook remains negative.
S&P said, "We also affirmed our 'B+' issue rating on the group's
upsized EUR380 million senior secured term loan facility due 2024
and EUR35 million revolving credit facility (RCF; undrawn at
transaction close) due 2023. The recovery rating on these
facilities remains at '3', reflecting our expectation for
meaningful (50%-70%, rounded estimate 60%) recovery prospects in
the event of a payment default.
"We expect APCOA's deleveraging will be delayed following the
planned EUR52 million dividend payment, of which EUR50 million
will be used to cover a shareholder loan repayment at holding
company level. The proposed transaction points to a more
aggressive financial policy than we previously anticipated.
APCOA's majority shareholder, private equity fund Centerbridge,
plans to raise a EUR30 million add-on to its existing EUR350
million term loan B to fund the transaction, with the remaining
balance to be funded by cash. We think the proposed transaction
will no longer enable the group to deleverage to debt to EBITDA of
about 6x at year-end 2017, as we previously anticipated. We now
forecast debt to EBITDA will remain closer to 6.5x at year-end
2017, compared with our previous expectation of about 6.0x.
"The negative outlook continues to reflect our view of the limited
leeway for underperformance under the current rating, because any
setbacks in the group's operating performance could hamper its
ability to deleverage. Throughout 2017, APCOA has reported
significant improvement in its operating margin, largely due to
the absence of additional restructuring initiatives that had
heavily burdened reported EBITDA margins in the past. We now
expect the group will show a stable operating trend over the
coming years, following sizable cost reductions in past years.
This will likely require the group to successfully manage a number
of contract renewals related to large contracts maturing in 2018.
"The rating on APCOA reflects our view of the group's position as
Europe's leading car park operator with revenues of about EUR675
million in 2016, prime asset locations, and a highly diversified
contract portfolio by geography and market sector. We also view
positively the group's above-average profitability for a real
estate service provider (which we classify as a facility service
provider within the wider business service sector), with S&P
Global Ratings-adjusted EBITDA margins sustainably above 25%. The
average remaining contract life is about eight to nine years, and
the group's historically high customer retention rates (averaging
about 96% with limited variation) should support forward
visibility, in our view.
"These strengths are partially offset by the relatively low
reported EBITDA margin of just 10%-11% that we forecast for APCOA
in 2017-2018. Reported EBITDA is depressed by the large rental
payments that the group must cover, resulting in relatively high
operating leverage. We also view negatively APCOA's volatile
profitability over the past couple of years. We observed a
declining trend in 2012-2016, burdened by material expenses
related to cost-cutting programs and losses related to a number of
contracts, which we include in our calculation of EBITDA, since we
consider those expenses part of the company's operating
activities."
APCOA's highly leveraged financial risk profile reflects its high
debt burden, with S&P Global Ratings' adjusted debt to EBITDA of
7.7x and EBITDA interest coverage of 2.0x-2.5x as of year-end 2016
(which is weak for the rating, but metrics were burdened by the
high restructuring expenses). S&P said, "The group's ownership by
a private equity firm, which causes us to assess its financial
policy as financial sponsor-6, leads us to expect its leverage
will remain elevated. In our base-case scenario, we anticipate
deleveraging, coming from improved EBITDA generation, which should
largely offset the impact of the proposed add-on to debt following
this transaction. We forecast low, albeit positive reported free
operating cash flow (FOCF) generation over our forecast period
through year-end 2019."
S&P said, "The group has a shareholder loan of about EUR400
million (post transaction) in place at the holding-company level,
which we view as equity. The proposed shareholder payout will
largely come in the form of a shareholder loan repayment. We
expect this transaction to be exceptional and do not anticipate
further payouts under the loan, which is why we continue to treat
it as equity. Any additional payouts could lead us to reclassify
the loan as debt-like in nature, in which case we would add the
remaining outstanding amount to our adjusted debt figures. The
rationale for equity treatment under our criteria reflects the
existence of stapling language, the deep structural subordination
against any senior debt, and the noncash paying nature of the
instrument and overall absence of meaningful creditor rights. We
note that the loan's documentation has an event of default in
place. However, this event of default only relates to the
shareholder loan itself, with no cross-default or acceleration to
the group's debt. As such, the shareholder loan justifies equity
treatment in our view.
"The negative outlook reflects our view that we could lower our
rating on APCOA to 'B' in the next few quarters if it doesn't
sustain its solid operating trend, supporting a reduction of its
adjusted leverage. Failure to show increased EBITDA generation,
enabling APCOA to deleverage to about 6.0x in the coming quarters,
coupled with reporting positive FOCF and maintaining adequate
liquidity, could put downward pressure on the rating.
"We might lower our rating if APCOA's debt to EBITDA didn't
improve to about 6.0x in the coming quarters, which could occur if
we anticipated that its reported EBITDA margin would contract to
below 9%. Although this is not our base case, we consider that
such a scenario could result from unexpected additional losses
under large contracts or failure to renew sizable upcoming
contract maturities in 2018, or if additional cost restructuring
led to lower and more volatile profitability than we currently
anticipate.
"We could also consider lowering the rating if we expected that
the group's FOCF would turn negative over the coming 12 months, or
if the company entered into significant debt-funded acquisitions
or undertook additional material shareholder returns.
"We could revise our outlook to stable if we saw APCOA performing
in line with our expectations, including achieving organic revenue
growth of about 3% while keeping the reported EBITDA margin at
between 10% and 11%, with no additional material exceptional
expenses. This would likely also require the group to show
sustainable positive FOCF generation, supported by stringent
control of working capital and expansionary capital investments.
"More specifically, we would expect the group to return debt to
EBITDA of about 6x in the following 12 months."
PHOENIX SOLAR: Board Submits Insolvency Filing in Munich Court
--------------------------------------------------------------
Becky Beetz at PV Magazine reports that the German solar PV
project developer Phoenix Solar AG has officially filed for
insolvency on Wednesday, Dec. 13.
According to PV Magazine, in a one sentence statement on its
website, the company said, "The Executive Board of Phoenix Solar
AG has submitted an insolvency filing to the relevant insolvency
court in Munich, [Wednes]day."
On Dec. 8, it announced it would start insolvency proceedings this
week after its U.S. subsidiary, Phoenix Solar Inc. received a
payment request from an unidentified customer to the tune of US$8
million, PV Magazine recounts.
"This exceeds the financial capabilities of Phoenix Solar AG,
therefore leads to insolvency and forces the Board to start the
insolvency proceedings," PV Magazine quotes the company as saying
on Dec. 8.
According to its latest financial data, the Phoenix Solar Group
has 128 employees, PV Magazine states. It is unclear how many of
them, or the subsidiaries, will be affected, PV Magazine notes.
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I R E L A N D
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ALPSTAR CLO 2: Moody's Hikes Class E Notes Rating to Ba2(sf)
------------------------------------------------------------
Moody's Investors Service has upgraded the ratings on the
following notes issued by Alpstar CLO 2 Plc:
-- EUR37.5M Class C Deferrable Senior Secured Floating Rate
Notes due 2024, Upgraded to Aaa (sf); previously on Jul 17,
2017 Upgraded to Aa1 (sf)
-- EUR42M Class D Deferrable Senior Secured Floating Rate Notes
due 2024, Upgraded to A3 (sf); previously on Jul 17, 2017
Affirmed Baa3 (sf)
-- EUR24M (Current outstanding balance of EUR17.0M) Class E
Deferrable Senior Secured Floating Rate Notes due 2024,
Upgraded to Ba2 (sf); previously on Jul 17, 2017 Affirmed Ba3
(sf)
Moody's also affirmed the ratings of the following notes issued by
Alpstar CLO 2 Plc:
-- EUR48.5M (Current outstanding balance of EUR26M) Class B
Deferrable Senior Secured Floating Rate Notes due 2024,
Affirmed Aaa (sf); previously on Jul 17, 2017 Affirmed Aaa
(sf)
Alpstar CLO 2 Plc, issued in April 2007, is a collateralised loan
obligation ("CLO") backed by a portfolio of mostly high yield
European loans denominated in Euro and USD. It is predominantly
composed of senior secured loans. The portfolio is managed by
Chenavari Investment Managers Holdings. The transaction's
reinvestment period ended in May 2014.
RATINGS RATIONALE
The rating actions on the notes are primarily a result of the
deleveraging of the senior notes following amortisation of the
underlying portfolio since the last rating action in July 2017.
The transaction pays semi-annually and on the November 2017
payment date, an amount of EUR77.2M was used to pay down the
senior notes in the transaction. Currently EUR26M out of an
original Class B amount of EUR48.5M remain outstanding, a factor
of 54%, and overcollateralisation (OC) ratios have increased as a
result of the deleveraging.
The key model inputs Moody's uses in its analysis, such as par,
weighted average rating factor, diversity score and the weighted
average recovery rate, are based on its published methodology and
could differ from the trustee's reported numbers. In its base
case, Moody's analysed the underlying collateral pool as having a
performing par of EUR116.288M and USD21.91M, defaulted par of EUR
8.22M, a weighted average default probability of 21.92%
(consistent with a WARF of 3044) over weighted average life of
4.45 years, a weighted average recovery rate upon default of
46.21% for a Aaa liability target rating, a diversity score of 13
and a weighted average spread of 3.43%. The USD assets in the
portfolio are unhedged.
The default probability derives from the credit quality of the
collateral pool and Moody's expectation of the remaining life of
the collateral pool. The estimated average recovery rate on future
defaults is based primarily on the seniority of the assets in the
collateral pool. In each case, historical and market performance
and a collateral manager's latitude to trade collateral are also
relevant factors. Moody's incorporates these default and recovery
characteristics of the collateral pool into its cash flow model
analysis, subjecting them to stresses as a function of the target
rating of each CLO liability it is analysing.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's
Global Approach to Rating Collateralized Loan Obligations"
published in August 2017.
Factors that would lead to an upgrade or downgrade of the ratings:
In addition to the base-case analysis, Moody's conducted
sensitivity analyses on the key parameters for the rated notes,
for which it assumed lower weighted average recovery rate for the
portfolio. Moody's ran a model in which it reduced the weighted
average recovery rate by 5%; the model generated outputs that were
unchanged for Classes B and C and were within one notch of the
base-case results for Classes D and E.
This transaction is subject to a high level of macroeconomic
uncertainty, which could negatively affect the ratings on the
note, in light of uncertainty about credit conditions in the
general economy. CLO notes' performance may also be impacted
either positively or negatively by 1) the manager's investment
strategy and behaviour and 2) divergence in the legal
interpretation of CDO documentation by different transactional
parties because of embedded ambiguities.
Additional uncertainty about performance is due to the following:
* Portfolio amortisation: The main source of uncertainty in this
transaction is the pace of amortisation of the underlying
portfolio, which can vary significantly depending on market
conditions and have a significant impact on the notes' ratings.
Amortisation could accelerate as a consequence of high loan
prepayment levels or collateral sales by the collateral manager or
be delayed by an increase in loan amend-and-extend restructurings.
Fast amortisation would usually benefit the ratings of the notes
starting with the notes having the highest prepayment priority.
* Recovery of defaulted assets: Market value fluctuations in
trustee-reported defaulted assets and those Moody's assumes have
defaulted can result in volatility in the deal's over-
collateralisation levels. Further, the timing of recoveries and
the manager's decision whether to work out or sell defaulted
assets can also result in additional uncertainty. Moody's analysed
defaulted recoveries assuming the lower of the market price or the
recovery rate to account for potential volatility in market
prices. Recoveries higher than Moody's expectations would have a
positive impact on the notes' ratings.
* Long-dated assets: The presence of assets that mature beyond the
CLO's legal maturity date exposes the deal to liquidation risk on
those assets. Moody's assumes that, at transaction maturity, the
liquidation value of such an asset will depend on the nature of
the asset as well as the extent to which the asset's maturity lags
that of the liabilities. Liquidation values higher than Moody's
expectations would have a positive impact on the notes' ratings.
* Foreign currency exposure: The deal has a significant exposure
to non-EUR denominated assets. Volatility in foreign exchange
rates will have a direct impact on interest and principal proceeds
available to the transaction, which can affect the expected loss
of rated tranches.
In addition to the quantitative factors that Moody's explicitly
modelled, qualitative factors are part of the rating committee's
considerations. These qualitative factors include the structural
protections in the transaction, its recent performance given the
market environment, the legal environment, specific documentation
features, the collateral manager's track record and the potential
for selection bias in the portfolio. All information available to
rating committees, including macroeconomic forecasts, input from
other Moody's analytical groups, market factors, and judgments
regarding the nature and severity of credit stress on the
transactions, can influence the final rating decision.
IRISH BANK: Unsecured Creditors Set to Receive Second Dividend
--------------------------------------------------------------
RTE News reports that unsecured creditors of the Irish Bank
Resolution Corporation are set to receive their second dividend
over the next few weeks.
In a statement, the Joint Special Liquidators of the bank said the
payment will be received by the end of January, RTE News relates.
The bank's unsecured creditors include the State, credit unions
and local authorities, RTE News discloses.
According to RTE News, the Joint Special Liquidators said the
payment of this second interim dividend -- worth EUR280 million
-- will bring the total dividend received by admitted unsecured
creditors to 50%.
About Irish Bank Resolution
Irish Bank Resolution Corp., the liquidation vehicle for what was
once one of Ireland's largest banks, filed a Chapter 15 petition
(Bankr. D. Del. Case No. 13-12159) on Aug. 26, 2013, to protect
U.S. assets of the former Anglo Irish Bank Corp. from being
seized by creditors. Irish Bank Resolution sought assistance
from the U.S. court in liquidating Anglo Irish Bank Corp. and
Irish Nationwide Building Society. The two banks failed and were
merged into IBRC in July 2011. IBRC is tasked with winding them
down and liquidating their assets. In February, when Irish
lawmakers adopted the Irish Bank Resolution Corp., IBRC was
placed into a special liquidation in the Irish High Court to
complete liquidation and distribution of the two banks' assets.
IBRC's principal asset as of June 2012 was a loan portfolio
valued at some EUR25 billion (US$33.5 billion). About 70 percent
of the loans were to Irish borrowers. Some 5 percent of the
portfolio was under U.S. law, according to a court filing. Total
liabilities in June 2012 were about EUR50 billion, according
to a court filing.
Most assets in the U.S. have been sold already. IBRC is involved
in lawsuits in the U.S.
IBRC was granted protection under Chapter 15 of the U.S.
Bankruptcy Code in December 2013.
Kieran Wallace and Eamonn Richardson of KPMG have been named the
special liquidators.
OZLME III: Moody's Assigns (P)B2 Rating to Class F Senior Notes
---------------------------------------------------------------
Moody's Investors Service has assigned provisional ratings to nine
classes of notes (the "Notes") to be issued by OZLME III
Designated Activity Company:
-- EUR 2,000,000 Class X Senior Secured Floating Rate Notes due
2030, Assigned (P)Aaa (sf)
-- EUR 225,000,000 Class A-1 Senior Secured Floating Rate Notes
due 2030, Assigned (P)Aaa (sf)
-- EUR 10,000,000 Class A-2 Senior Secured Fixed Rate Notes due
2030, Assigned (P)Aaa (sf)
-- EUR 35,500,000 Class B-1 Senior Secured Floating Rate Notes
due 2030, Assigned (P)Aa2 (sf)
-- EUR 20,000,000 Class B-2 Senior Secured Fixed Rate Notes due
2030, Assigned (P)Aa2 (sf)
-- EUR 26,500,000 Class C Senior Secured Deferrable Floating Rate
Notes due 2030, Assigned (P)A2 (sf)
-- EUR 21,000,000 Class D Senior Secured Deferrable Floating Rate
Notes due 2030, Assigned (P)Baa2 (sf)
-- EUR 22,000,000 Class E Senior Secured Deferrable Floating Rate
Notes due 2030, Assigned (P)Ba2 (sf)
-- EUR 12,000,000 Class F Senior Secured Deferrable Floating Rate
Notes due 2030, Assigned (P)B2 (sf)
RATINGS RATIONALE
Moody's provisional rating of the Notes addresses the expected
loss posed to noteholders. The rating reflects the risks due to
defaults on the underlying portfolio of assets, the transaction's
legal structure, and the characteristics of the underlying assets.
OZLME III is a managed cash flow CLO. The issued notes are
collateralized primarily by broadly syndicated first lien senior
secured corporate loans. At least 90% of the portfolio must
consist of senior secured loans, senior secured bonds and eligible
investments, and up to 10% of the portfolio may consist of second
lien loans, unsecured loans, mezzanine obligations and high yield
bonds.
Och-Ziff Europe Loan Management Limited (the "Manager") manages
the CLO. It directs the selection, acquisition, and disposition of
collateral on behalf of the Issuer. After the reinvestment period,
which ends in February 2022, the Manager may reinvest unscheduled
principal payments and proceeds from sales of credit risk and
credit improved obligations, subject to certain restrictions.
In addition to the nine classes of notes rated by Moody's, the
Issuer will issue EUR 39.9m of subordinated notes which will not
be rated.
The transaction incorporates interest and par coverage tests
which, if triggered, divert interest and principal proceeds to pay
down the notes in order of seniority.
Loss and Cash Flow Analysis:
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3.2.1
of the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in August 2017.
The cash flow model evaluates all default scenarios that are then
weighted considering the probabilities of the binomial
distribution assumed for the portfolio default rate. In each
default scenario, the corresponding loss for each class of notes
is calculated given the incoming cash flows from the assets and
the outgoing payments to third parties and noteholders. Therefore,
the expected loss or EL for each tranche is the sum product of (i)
the probability of occurrence of each default scenario and (ii)
the loss derived from the cash flow model in each default scenario
for each tranche. As such, Moody's encompasses the assessment of
stressed scenarios.
The key model inputs Moody's used in its analysis, such as par,
weighted average rating factor, diversity score and the weighted
average recovery rate, are based on its published methodology and
could differ from the trustee's reported numbers. For modeling
purposes, Moody's used the following base-case assumptions:
Performing par and principal proceeds balance: EUR400,000,000
Diversity Score: 40
Weighted Average Rating Factor (WARF): 2675
Weighted Average Spread (WAS): 3.65%
Weighted Average Recovery Rate (WARR): 42.0%
Weighted Average Life (WAL): 8.5 years
Loss and Cash Flow Analysis:
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's
Global Approach to Rating Collateralized Loan Obligations"
published in August 2017.
Factors that would lead to an upgrade or downgrade of the ratings:
The performance of the Notes is subject to uncertainty. The
performance of the Notes is sensitive to the performance of the
underlying portfolio, which in turn depends on economic and credit
conditions that may change. The Manager's investment decisions and
management of the transaction will also affect the performance of
the Notes.
Stress Scenarios:
Together with the set of modeling assumptions above, Moody's
conducted an additional sensitivity analysis, which was a
component in determining the provisional rating assigned to the
rated Notes. This sensitivity analysis includes increased default
probability relative to the base case.
Below is a summary of the impact of an increase in default
probability (expressed in terms of WARF level) on the Notes (shown
in terms of the number of notch difference versus the current
model output, whereby a negative difference corresponds to higher
expected losses), assuming that all other factors are held equal:
Percentage Change in WARF -- increase of 15% (from 2675 to 3076)
Rating Impact in Rating Notches
Class X Senior Secured Floating Rate Notes: 0
Class A-1 Senior Secured Floating Rate Notes: 0
Class A-2 Senior Secured Fixed Rate Notes: 0
Class B-1 Senior Secured Floating Rate Notes: -2
Class B-2 Senior Secured Fixed Rate Notes: -2
Class C Senior Secured Deferrable Floating Rate Notes: -2
Class D Senior Secured Deferrable Floating Rate Notes: -2
Class E Senior Secured Deferrable Floating Rate Notes: -1
Class F Senior Secured Deferrable Floating Rate Notes: 0
Percentage Change in WARF -- increase of 30% (from 2675 to 3478)
Rating Impact in Rating Notches
Class X Senior Secured Floating Rate Notes: 0
Class A-1 Senior Secured Floating Rate Notes: -1
Class A-2 Senior Secured Fixed Rate Notes: -1
Class B-1 Senior Secured Floating Rate Notes: -3
Class B-2 Senior Secured Fixed Rate Notes: -3
Class C Senior Secured Deferrable Floating Rate Notes: -4
Class D Senior Secured Deferrable Floating Rate Notes: -3
Class E Senior Secured Deferrable Floating Rate Notes: -1
Class F Senior Secured Deferrable Floating Rate Notes: -2
=========
I T A L Y
=========
CREDITO VALTELLINESE: Fitch Cuts IDR to B-, on Watch Evolving
-------------------------------------------------------------
Fitch Ratings has downgraded Credito Valtellinese's (Creval) Long-
Term Issuer Default Rating (IDR) to 'B-' from 'BB-' and Viability
Rating (VR) to 'b-' from 'bb-' and placed them on Rating Watch
Evolving (RWE).
The rating action follows the announcement by Creval of a business
plan, which envisages a EUR700 million capital increase aimed at
accelerating the clean-up of its balance sheet through the
disposal of about EUR2.1 billion of doubtful loans, after
reclassifying EUR800 million of loans as doubtful loans from
unlikely-to-pay exposures previously.
The downgrade of the VR reflects Fitch's view that the prospects
for Creval's ongoing viability have weakened because the decision
to materially accelerate the reduction of impaired loans will
crystallise losses. The bank plans to cover these losses by
raising new capital or by undertaking alternative capital
strengthening initiatives. The RWE reflects Fitch's expectation
that the bank's Long-Term IDR, VR and debt ratings could be
upgraded if the announced transactions are completed successfully,
which would result in improved asset quality and better
profitability prospects. The RWE also reflects Fitch view that
failure to do so would, in Fitch opinion, increase the risk of the
bank failing given its more limited financial flexibility.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Creval's VR reflects Fitch opinion that capital levels are not
commensurate with the risks arising from its large stock of
impaired loans while the bank's ability to generate capital
internally is extremely weak.
Despite having disposed of about EUR1.4 billion of doubtful loans
through a securitisation during 2017, which reduced the impaired
loans ratio to around 21% at end-3Q17 from over 27% at end-1H17,
Creval's recently announced strategy requires the bank to
undertake additional EUR772.5 million loan impairment charges
(LIC) to finance disposals. This is because LICs would not be
sustainable at current capital levels in the absence of capital-
strengthening initiatives.
Unreserved impaired loans accounted for over 150% of Fitch Core
Capital (FCC) at end-3Q17, which is already extremely high, and
capital has come under further pressure as the bank has announced
its intention to reclassify around EUR800 million of unlikely-to-
pay loans as doubtful (sofferenze), which will require higher
coverage levels in order to be disposed of.
The VR also reflects Fitch's belief that the planned capital
increase, which Creval's expects to complete by end-1Q18, bears
high execution risks since the required capital is large relative
to the bank's market capitalisation and common equity. In the week
immediately following the announcement of the plan, Creval's
market capitalisation more than halved, which might signal that
access to capital for Creval is highly uncertain. The capital
increase is pre-underwritten by the arranger of the transaction
(Mediobanca, BBB/Stable/bbb) and by Citigroup Global Markets
Limited (A/Stable). It is subject to conditions 'in line with the
market practice for similar transactions and to specific
provisions, including the absence of any preclusions or events
which may affect the achievement by the issuer of the financial
targets set forth in the business plan, and the fact that the
issuance conditions that will be actually applicable on the launch
of the offer, considering the market conditions and the feedback
of the institutional investors, allow to successfully complete the
share capital increase'.
Fitch acknowledges that the successful implementation of the
announced strategic plan would restore Creval's balance-sheet as
it encompasses sizable capital strengthening, loan book de-risking
and a relatively fast recovery in profitability, due to the
absence of future large (LICs). The envisaged loan book clean-up
would bring the non-performing exposures (NPE) ratio as calculated
by the bank to 10.6% at end-2018 and 9.6% at end-2020, which is
better than current domestic industry averages but would still be
weak by international comparison, while Fitch estimate that
unreserved impaired loans would fall to just above 50% of FCC in
2018.
In Fitch's view, management expectations of net interest income
and net commissions growing by 3% per year are ambitious in the
current economic environment. The increase in earnings, coupled
with the decrease in operating costs, facilitated by the merger of
Credito Siciliano into the parent and a reduction in branches (-
20%) and personnel (-7%), should lead to a cost/income of 57.5% in
2020, as calculated by the bank, down 10 percentage points from
the current level. The reduction in LICs, which the bank expects
at 64 bps of gross loans in 2020 from 271 bps at end-9M17, seems
more achievable after the loan portfolio clean-up.
Fitch's assessment of funding and liquidity reflects a heightened
risk of funding becoming vulnerable to depositor sentiment should
Creval fail to raise capital.
The Short-Term IDR has been placed on Rating Watch Negative (RWN)
rather than on RWE because an upgrade would require an upgrade of
the Long-Term IDR to at least 'BBB-', which Fitch does not expect.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating (SR) and Support Rating Floor (SRF)
reflect Fitch view that following the introduction of Bank
Recovery and Resolution Directive, the likelihood of Creval being
supported, in case of need, by the Italian authorities has reduced
substantially. Fitch therefore no longer rely on the possibility
of such support in Fitch ratings.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Creval's subordinated debt was downgraded to 'CCC' and is rated
one notch below the bank's VR reflecting Fitch assessment of loss
severity relative to senior unsecured creditors. Fitch has also
assigned a Recovery Rating 5 (RR5) to these instruments to reflect
the risk of below average recovery prospects for subordinated
bondholders.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The ratings are primarily sensitive to the completion of the
planned capital increase. If the capital increase is successful,
Creval's creditworthiness would improve, which could lead to an
upgrade of the VR, IDR and debt ratings, potentially by more than
one notch. An upgrade would primarily reflect improved asset
quality and lower pressure on capital from net impaired loans.
Fitch believe that after completion of the transactions the bank
will have to demonstrate its ability to implement its strategy,
and Fitch expect that improvements in earnings will be gradual.
Conversely, failure to achieve the capital increase could result
in a downgrade of VR if Fitch believe that Creval's risk of
failure has increased.
Fitch expects to resolve the RWE once there is greater clarity
over the likely outcome of the planned transactions. Although the
bank plans to close the transaction by end-1Q18, a resolution of
the RWE could take longer than the typical six-month period if
these plans are delayed.
SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of the SR and upward revision of the SRF would be
contingent on a positive change in the sovereign's propensity to
support Creval. While not impossible, this is highly unlikely, in
Fitch's view.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The rating of the notes is sensitive to a change in the bank's VR.
The rating is also sensitive to a change in the notes' notching,
which could arise if Fitch changes its assessment of their loss
severity or their non-performance relative to the risk captured in
the VR.
The rating actions are as follows:
Long-Term IDR: downgraded to 'B-' from 'BB-'; placed on RWE
Short-Term IDR: 'B'; placed on RWN
Viability Rating: downgraded to 'b-' from 'bb-'; placed on RWE
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
EMTN Long-term rating: downgraded to 'B-' from 'BB-'; placed on
RWE
EMTN Short-Term Rating: 'B'; placed on RWN
Subordinated notes: downgraded to 'CCC' from 'B+'; placed on RWE;
RR5 assigned
ILVA SPA: Plant Pollution Issues May Put Rescue Deal at Risk
------------------------------------------------------------
James Politi and Michael Pooler at The Financial Times report that
Ilva, the Italian owner of the country's largest steelworks in the
southern town of Taranto, was to be rescued from insolvency by
ArcelorMittal in a deal worth EUR1.8 billion, raising hopes of a
resolution to one of the country's thorniest industrial and
environmental crises.
But what may have looked like a good deal in Rome seemed very
different to politicians in Taranto and the wider Puglia region,
who have mounted a legal challenge to the plan on the grounds that
it does not curb pollution from the plant quickly enough, the FT
states.
According to the FT, with Carlo Calenda, Italy's economic
development minister, forced to dash to Taranto days ago to try to
salvage the deal agreed in June, the battle over the future of
Ilva has emerged as a barometer for the foreign investment climate
in Italy and underlined how local authorities can place regulatory
and judiciary roadblocks in the way of deals they do not like.
Italy's government and main trade unions fear the opposition could
make ArcelorMittal backtrack on the agreement and trigger the
closure of the plant, the FT relates.
"This has put the entire sale operation at risk," the FT
quotes Mr. Calenda as saying. "This must be the first case in the
world in which an industrial revival of this size is ostracized by
the representatives of the territory that will most benefit from
it."
The agreement could yet survive, and the mood improved after
Mr. Calenda met Taranto mayor Rinaldo Melucci, the FT relays.
Mr. Melucci and Michele Emiliano, the regional governor of Puglia,
agreed to direct talks with the government over the terms of the
deal, due to begin this month, the FT discloses.
===================
L U X E M B O U R G
===================
GLOBAL BLUE: Moody's Revises Outlook to Pos. & Affirms B1 CFR
-------------------------------------------------------------
Moody's Investors Service has changed to positive from stable the
outlook on the ratings of Global Blue Finance S.a r.l. (Global
Blue), the indirect holding company of Global Blue Acquisition
B.V. Concurrently, Moody's has affirmed Global Blue's B1 corporate
family rating (CFR) and the B1 senior secured instrument ratings
issued at Global Blue Acquisition B.V., a fully-owned and
guaranteed subsidiary of Global Blue. In addition, Moody's has
upgraded Global Blue's probability of default rating (PDR) to B1-
PD from B2-PD. The outlook on Global Blue Acquisition B.V. has
also been changed to positive from stable.
"Moody's decision to change Global Blue's outlook to positive
reflects the company's solid earnings growth and reduction in
leverage which translate into a strong positioning in the rating
category" says Guillaume Leglise, a Moody's analyst for Global
Blue. "The positive outlook also factors in Moody's expectations
of continued robust free cash flow generation going forward
supported by profitability growth".
RATINGS RATIONALE
- RATIONALE FOR POSITIVE OUTLOOK
Moody's decision to change the outlook to positive from stable
reflects Global Blue's strong positioning in its rating category
following a reduction in Moody's adjusted leverage to 3.7x at end-
March 2017 (from 4.4x as of end-March 2016). This reflects the
strong earnings growth achieved in the fiscal year ended 31 March
2017 (FY2017) and in the first 6 months of FY2018, aided by solid
top line growth and cost discipline. Global Blue's EBITDA
increased to EUR175 million in the 12 months to September 30,
2017, up 28% compared to 31 March 2016.
The positive outlook reflects Moody's expectation of continued
growth in earnings led by growing travel demand and increasing
traveler spend in some of Global Blue's key markets. This,
together with more balanced financial policies, will lead to a
further reduction in leverage and improved cash flow coverage.
Moody's also assumes continued access to the revolving credit
facility and strong headroom under applicable financial covenants.
- RATIONALE FOR AFFIRMATION OF B1 CFR
The rating affirmation is driven principally by Moody's
expectation that Global Blue will continue to improve its
financial profile reflecting a positive earnings growth. This will
be helped by the positive momentum in the travel industry as well
as the large and structurally growing VAT refund market
benefitting from emerging market wealth growth, increased cross-
border travel, related luxury spend and rising VAT rates.
Moody's believes that Global Blue presents good deleveraging
prospects, as strong demand from certain emerging markets in Asia
notably China will continue to boost earnings growth in the next
12-18 months. Moody's views favorably the solid track record of
the company and, as such, gross debt/EBITDA (as adjusted by
Moody's) is expected to reduce below 3.5x in the next 12-18
months.
Nevertheless, the rating continues to incorporate the company's
high reliance on sales in the EU as a destination market for
travelers, and also on a small number of source countries for
travelers, which poses some risk of concentration from both sides.
However, Global Blue has diversified away from the EU as a
destination in recent years, as evidenced by the increased revenue
contribution of APAC countries (now representing approximately 17%
of group revenue), notably through the acquisition of Currency
Select (dynamic currency solution) in 2016. Any exogenous factor
which could affect EU travel flows can lead to earnings swings as
illustrated in recent years after terrorists attacks in France in
2015/16. Also, almost half of Global Blue's VAT refund segment's
revenue emanated from travelers from China, Russia and Gulf
countries in the 12 months to 31 March 2017.
In addition, Global Blue's CFR is also constrained by the
shareholder-friendly financial policy of the company. Since the
2012 leverage buyout, Global Blue has distributed up to
approximately EUR455 million to its shareholders via repayments of
a shareholder loan, as permitted under its bank documentation.
Moody's cautions that further rating upside will be contingent on
a longer track record of more balanced financial policy.
Global Blue's liquidity profile is good, but subject to sizeable
seasonal swings reflecting holiday patterns. As of September 30,
2017, the company reported a cash balance of EUR56 million, and a
EUR80 million revolving credit facility (RCF), of which EUR25
million was drawn (including EUR7 million of letters of credit for
guarantees). The term loans and RCF contain one net leverage
financial covenant which was reset at 6.5x as part of the
company's recent repricing exercise in October 2017. This covenant
is tested quarterly and Moody's expects the company will
comfortably comply with the covenant test.
- RATIONALE FOR PDR UPGRADE
The upgrade of Global Blue's PDR to B1-PD from B2-PD, in line with
the B1 CFR, reflects Moody's use of an average family recovery
level of 50% reflecting an all-bank debt structure with loose
financial covenants. As part of the loan repricing completed in
October 2017, Global Blue has amended certain terms and conditions
in its bank debt documentation, and reset the net leverage
financial covenant at 6.5x, a level deemed very loose (versus an
historical step-down net leverage covenant, with a testing of 4.7x
as at end-September 2017). As at end-September 2017, Global Blue
reported a net leverage ratio of 3.4x.
STRUCTURAL CONSIDERATIONS
The CFR is assigned at Global Blue Finance S.a r.l., the top
entity of the restricted group and indirect holding company of the
operating subsidiaries, while the borrower under the debt
facilities is Global Blue Acquisition B.V. Following the repricing
transaction completed in October 2017, the capital structure
consists of a senior secured term loan B, representing a total
amount of EUR630 million. This loan is rated B1 in line with the
CFR. The facilities also include an RCF of EUR80 million, which is
generally used to fund seasonal working capital. Under the terms
of the loan agreement and an intercreditor agreement, the RCF and
term loan rank pari passu with each other. The facilities benefit
from a guarantee from guarantors representing not less than 80% of
EBITDA of the company, plus guarantees and security required only
from companies in Switzerland, Germany, Italy, France, UK, the
Netherlands, Luxembourg or any jurisdiction representing more than
10% consolidated EBITDA.
The capital structure also consists of a shareholder loan of
approximately EUR388 million as at September 2017, which matures
in December 2025. The shareholder loan lent by Global Blue
Management & Co S.C.A., in favor of Global Blue Finance S.a r.l.
as the ultimate borrower, consists of three inter-company loans.
The shareholder loans are treated as equity for the purpose of
Moody's metrics calculations.
From the outset in 2012, Global Blue has structured its
shareholder loan to achieve full equity treatment and Moody's
rating approach has consistently been on that basis. However, in
November 2017 as part of its review, further analysis by Moody's
identified that the shareholder loan documentation did not meet
all of conditions to qualify for equity treatment. The company
amended the shareholder loan documentation to ensure continuing
equity treatment by Moody's, and on that basis no rating action
was taken.
WHAT COULD CHANGE THE RATING UP/DOWN
An rating upgrade could materialise if (i) the company continues
to grow and to exhibit solid operational performance, with
operating margin improvement, (ii) its leverage ratio (debt/EBITDA
ratio as adjusted by Moody's) is sustained below 4.0x, and (iii)
it maintains a robust free cash flow generation of at least EUR50
million (after shareholder loan repayments) coupled with a good
liquidity profile. Moody's cautions that further rating upside
will be contingent on a longer track record of more balanced
financial policies between shareholders and creditors.
Conversely negative pressure could be exerted on the rating if
Global Blue's operating performance weakens or if the company
increases its debt as a result of acquisitions or other corporate
activity, such that its debt/EBITDA (as adjusted by Moody's) is
sustainably above 5.0x. A weakening in the company's liquidity
profile or major shareholder distribution could also exert
downward pressure on the rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
Domiciled in Luxembourg with headquarters in Switzerland, Global
Blue is a leading provider of VAT and Goods and Service Tax (GST)
refunds to travelers, as well as currency conversion services. For
FY 2017 (ended 31 March 2017), the company reported revenue and
EBITDA (as adjusted by the company) of approximately EUR418
million and EUR167 million, respectively.
PARK LUXCO 3: Moody's Revises Outlook to Neg. & Affirms B1 CFR
--------------------------------------------------------------
Moody's Investors Service affirmed the B1 corporate family rating
(CFR) and B1-PD probability of default rating (PDR) of Park LuxCo
3 S.C.A., a holding company of the German parking operator Apcoa.
Concurrently, Moody's affirmed the B1 ratings on the EUR350
million senior secured term loan B due 2024 which will be
increased to EUR380 million upon completion of the transaction as
well as the EUR35 million revolving credit facility (RCF) due 2023
both issued by APCOA Parking Holdings GmbH. The outlook on all
ratings was changed to negative from stable.
Net proceeds from the term loan add-on, along with EUR24 million
of cash on balance sheet, will be used to fund a EUR52 million
distribution to shareholders.
"The negative outlook on Apcoa's B1 CFR reflects execution risks
regarding a reduction of its Moody'-adjusted debt/EBITDA excluding
operating leases to below 6.0x in the next 12 months from 6.5x
expected at closing", says Eric Kang, a Moody's analyst.
RATINGS RATIONALE
The B1 CFR with a negative outlook reflects the high Moody's-
adjusted leverage of 6.5x pro-forma for the envisaged transaction,
excluding operating leases and based on the estimated 2017
company's adjusted EBITDA of EUR68 million (3.5x including
operating leases) as well as execution risks with respect to
deleveraging to below 6.0x in the next 12 months.
Moody's expects already signed new businesses and operational
efficiencies to support EBITDA growth in the next 12 months but
deleveraging to below 6.0x will depend on the company's ability to
win additional new businesses and renew existing contracts at
acceptable terms. The company needs to renew contracts
representing EUR14.4 million of contract contribution in 2018.
Somewhat offsetting the above is the company's high historical
annual retention rate of between 94% to 98% per annum since 2010
as well as its track record of year-on-year EBITDA improvement
since 2015 driven by new business wins and cost efficiencies which
more than offset business losses and pricing pressures on
contracts up for renewal.
As of September 2017, contract contribution increased by 2.6% on a
last twelve month basis. This was the result of new business wins
and good performance of existing businesses in Germany and Italy
which altogether more than offset the loss of the Oslo airport
contract. Adjusted EBITDA (as reported) was up 5.9% driven by the
increased activity as well as cost reductions and operational
efficiencies.
Moody's expects moderate free cash flow of around EUR15 million in
the next 12 months reflecting the company's sizeable capex
requirements. Capex mainly relates to technical equipment at
sites, such as the barrier system and operative infrastructure,
whereas all building-related or structural capex is typically
borne by the landlord. Existing business capex is typically around
10%-11% of existing business contract contribution whereas new
business capex typically equates to the new contract's first year
of contract contribution. Overheads capex is also expected to
remain in the high single digit million euros in the next 12
months due to the increased investment in digitalisation.
LIQUIDITY
Apcoa's liquidity is adequate. As of September 2017 and pro forma
for the transaction, cash on balance sheet will be EUR19 million
and the EUR35 million RCF is expected to be undrawn at closing.
Moody's also expects the company to maintain ample covenant
headroom under its net leverage covenant tested quarterly, with
the target being revised to 7.5x with no step-down following
completion of the envisaged transaction.
STRUCTURAL CONSIDERATIONS
Applying Moody's Loss Given Default methodology with a recovery
rate of 50%, the instrument ratings on the term loan B and the RCF
are B1. This is in line with the B1 CFR reflecting their pari
passu ranking and the fact that there is no other debt instrument
in the capital structure.
RATING OUTLOOK
The negative outlook reflects the increased Moody'-adjusted
debt/EBITDA of 6.5x (excluding operating leases) at closing as
well as execution risks with respect to a rapid deleveraging in
the next 12 months. Moody's will consider stabilising the outlook
if EBITDA improvement in the next 12 months leads to a reduction
in the Moody's-adjusted debt/EBITDA to below 6.0x (excluding
operating leases) on a sustained basis.
FACTORS THAT COULD LEAD TO AN UPGRADE/DOWNGRADE
Although unlikely in the near term given rating action, upward
pressure could arise over time if (1) the Moody's-adjusted
debt/EBITDA sustainably reduces towards 3.0x (below 5.0x excluding
operating leases) and (2) the company maintains a solid liquidity
profile with the Moody's-adjusted free cash flow/debt improving to
above 1.5% (above 5% excluding operating leases).
Downward pressure on the ratings could arise if earnings weaken
such that (1) the Moody's-adjusted debt/EBITDA exceeds 3.5x
sustainably (exceeds 6.0x excluding operating leases) or (2) free
cash flow generation or liquidity were to worsen. Any material
debt-funded acquisition or further shareholder friendly action
could further put pressure on the ratings.
The principal methodology used in these ratings was Business and
Consumer Service Industry published in October 2016.
Apcoa is a leading European parking operator, managing
approximately 1.4 million car parking spaces across ca. 9,000
sites in 13 countries. It generated revenues of EUR674 million in
2016.
=====================
N E T H E R L A N D S
=====================
CDS HOLDCO III: Moody's Assigns B2 CFR, Outlook Negative
--------------------------------------------------------
Moody's Investors Service has assigned a first-time B2 Corporate
Family Rating ("CFR") and a B2-PD probability of default rating
("PDR") to CDS HOLDCO III B.V.'s ("M7"), a pay-tv operator in
several European markets including Netherlands, Czech and
Slovakia. At the same time, the agency has assigned a B2 rating to
M7's senior secured Term Loan B which is being re-priced and
upsized by EUR155 million to EUR580 million, and a B2 rating to
the undrawn senior secured revolving credit facility, which is
being upsized to EUR20 million from EUR10 million.
The proceeds from the increase in Term Loan B together with cash
will be used to buy-out the minority shareholders for EUR175
million. After the minority shareholders (Providence Equity and
Airbridge Investments) are bought-out, M7 will become 95% owned by
Astorg Partners and 5% by M7's management.
"The B2 ratings primarily reflect M7's good cash flow generation
despite its niche market position and the long-term challenges
that could affect its business model that rests on finding and
exploiting niche growth opportunities within highly competitive
European pay-TV markets," says Gunjan Dixit, a Moody's Vice
President -- Senior Credit Officer, and lead analyst for M7.
"The negative outlook on M7's ratings reflects its high Moody's
adjusted gross leverage of 5.3x incorporating the buy-out of
minority shareholders. While Moody's expect the company to de-
lever rapidly over the next 12-24 months, Moody's cautiously
recognize the risks associated with the execution of its business
plan," adds Mrs Dixit.
RATINGS RATIONALE
M7's B2 CFR reflects (1) the good historical performance of the
company's operations in the mature Dutch and Belgian pay TV
markets; (2) the successful conversion of subscribers to higher
service fees and pay TV packages in the Czech and Slovak
republics; (3) the advantages of Direct To Home (DTH) technology
over cable in low density population areas and the niche position
the company benefits from in servicing the recreational market;
(4) the good cash generation ability of the company as a result of
limited maintenance capital expenditures and favourable working
capital dynamics; and (5) its strong liquidity profile.
The B2 CFR also reflects (1) the company's small scale in a highly
competitive European Pay TV market, especially in areas where
larger fibre and cable operators are present; (2) operational
complexity associated with having presence in several European
markets; and (3) despite good track record, the execution risks
surrounding the company's long-term ability to continue growing
EBITDA through finding new growth opportunities in markets,
continuing further price increases and an up-selling strategy
while avoiding higher churn rates.
The refinancing transaction to facilitate the buy-out of minority
shareholders will result in an increase in M7's reported net
leverage to 5.0x expected by the end of 2017 compared to 3.4x
prior to the transaction. Moody's adjusted gross debt to EBITDA
will concurrently deteriorate to 5.3x by the end of 2017 compared
to 3.9x on a last twelve months ending September 30, 2017. While
the company anticipates to de-lever rapidly from 2018 onwards on
the back of EBITDA growth and mandatory cash flow sweeps, Moody's
cautiously take into account the execution risks associated with
the successful delivery of the business plan.
M7's overall revenue growth was 0.6% in 2016 and Moody's expects a
slight decline in 2017. The company's reported EBITDA grew solidly
by 15% in 2016 and the agency expects 5% growth in 2017. Over the
next few years, Moody's expects the company to grow its revenues
by mid-single digit with a similar growth in EBITDA (before any
exceptional costs). This growth will be supported by (1) rapid
growth in Germany following the successful launch of the new pay
TV low-priced in 2018; (2) good growth in Czech and Slovakia; (3)
a stabilization followed by moderate growth in the Netherlands;
and (4) good growth in Austria and Belgium, although their
contribution to overall business will remain fairly small.
However, Moody's expect the overall EBITDA margin for M7 to
slightly weaken from 2018 affected by increased programming costs,
subscriber acquisition costs and product launch costs.
While the company's EBITDA has been growing well supported by cost
savings, underperformance in its operations, particularly in
Germany, Czech Republic and Slovakia could slow-down EBITDA growth
compared to the current plan. This may slow down the company's de-
leveraging ability. Nevertheless, Moody's takes good comfort from
the company's past track record of reducing debt via sustained
free cash flow generation (Moody's adjusted FCF/ Debt ratio stood
healthy at 8.5% for the last twelve months ended September 30,
2017).
M7's liquidity is strong, with good cash flow from operations
supported by limited maintenance capital expenditures and
favourable working capital dynamics as the company receives
advance payments from its subscribers. M7's liquidity is also
supported by the back-ended nature of its financing and the EUR20
million RCF which is expected to remain undrawn in the coming 18
months.
The B2 rated Term loan B, along with the EUR20 million RCF,
benefits from a security package that largely includes share
pledges. They also benefit from guarantees from a number of
guarantors which together represent no less than 85% of M7's
consolidated assets and EBITDA.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects that the company is initially weakly
positioned relative to the ratio thresholds for the B2 rating,
owing to the high leverage of 5.3x following the buyout of
minority shareholders. The negative outlook also reflects the
execution risks associated with the successful delivery of the
company's business plan over the next few years. Material under-
performance could preclude rapid de-leveraging going forward.
WHAT COULD CHANGE THE RATING UP/DOWN
Downwards rating pressure could arise if (1) adjusted leverage
remains above 5.0x on a sustained basis; (2) the company
materially under-performs its business plan, or its churn levels
increase as it continues to introduce price increases across
markets; (3) the company engages in further aggressive shareholder
returns; and/or (4) if its liquidity profile were to deteriorate
and its Moody's adjusted free cash flow/ debt ratio falls below
5.0%.
Upwards rating pressure could arise if (1) the business grows in
line with its business plan translating into healthy organic
revenue and EBITDA growth; and (2) Moody's adjusted Gross Debt/
EBITDA reduces to below 4.0x on a sustained basis. Upwards
pressure would also rely on the company maintaining Moody's
adjusted FCF/ debt sustainably above 15% and adequate liquidity.
LIST OF AFFECTED RATINGS
Assignments:
Issuer: CDS HOLDCO III B.V.
-- Corporate Family Rating, Assigned B2
-- Probability of Default Rating, Assigned B2-PD
-- Senior Secured Bank Credit Facility, Assigned B2
Outlook:
Issuer: CDS HOLDCO III B.V.
-- Outlook, Assigned Negative
The principal methodology used in these ratings was Global Pay
Television - Cable and Direct-to-Home Satellite Operators
published in January 2017.
M7, headquartered in Luxembourg, is a DTH and IPTV operator with
over 3 million subscribers and presence in the Netherlands,
Belgium, the Czech Republic, Slovakia, Austria and Germany. The
company distributes TV content to subscribers via satellite
transmission and provides triple play offers in the Netherland and
Belgium. For the year 2016, the company reported revenues of
EUR329 million and EBITDA of EUR104 million.
===========
R U S S I A
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ENERGO-PRO AS: Fitch Assigns 'BB' Long-Term Issuer Default Rating
-----------------------------------------------------------------
Fitch Ratings has assigned ENERGO-PRO a.s.' (EPas) a final Long-
Term Issuer Default Rating (IDR) of 'BB'/Stable and the utilities
company EUR370 million 4% notes due 2022 a final senior unsecured
'BB' rating.
The final rating of the notes reflects the bonds' final terms and
is in line with EPas' IDR as the notes are issued by EPas and
constitute direct, unconditional and unsecured obligations of EPas
and rank equally among themselves and with all other unsecured and
unsubordinated obligations of EPas. The notes are initially fully
and unconditionally guaranteed by ENERGO-PRO Georgia Generation
JSC, ENERGO-PRO Georgia JSC as well as by ENERGO-PRO VARNA EAD,
once the latter has redeemed its existing bonds. The guarantors
together represented around 80% of consolidated EBITDA in 2016.
The proceeds are being used by EPas for its general corporate
purposes, including the refinancing of group indebtedness.
EPas' ratings reflect a supportive network regulatory regime and
support mechanisms available for parts of the generation business,
as well as the company's geographic diversification. The ratings
also factor in EPas' small size relative to other rated European
utilities; cash flow volatility due to supply pass-through items;
regulatory changes; and varying hydrology conditions affecting
generation volumes. The operating environment and key-person risk
stemming from ultimate ownership by one individual are also
limiting factors. The ratings further reflect EPas' consolidated
group profile, without notching for subordination based on the
group refinancing plan.
KEY RATING DRIVERS
Diversified Group, Small Size: EPas is an independent hydro power
producer and electricity distributor in the Black Sea region,
operating 35 power plants in Bulgaria (BBB/Stable), Georgia (BB-
/Stable) and Turkey (BB+/Stable), with a total installed capacity
of 854MW (of which 87% are hydro power plants), up to 3TWh of
power generation per annum and about 10TWh of electricity
distributed in Bulgaria and Georgia. EPas is small compared with
most rated European utilities, although the company benefits from
geographical diversification with Georgian and Bulgarian
businesses each contributing about 41% of EBITDA and the remainder
is generated in Turkey.
Among Largest in Georgia and Bulgaria: EPas operates one of the
three electricity distributors in Bulgaria, covering north-eastern
regions of Bulgaria (about 26% of the country). In Georgia EPas
operates one of the largest electricity distribution and supply
companies, covering about 85% of the country's territory. The
company also benefits from access to end-customers payments
through its supply business in Bulgaria and Georgia. In Bulgaria
the supply business reports about 5% EBITDA margin, while in
Georgia the supply business is not legally unbundled at present
and is a pass-through item for the regulated distribution
business.
Nascent Distribution Regulation: The majority of EPas' EBITDA
(about 55%) is derived from regulated distribution businesses in
Bulgaria and Georgia. Fitch view the regulatory framework in these
countries as supportive, but weaker than more established
frameworks in most EU countries as although it uses the regulated
asset base principle, it is based on historical book values,
rather than replacement values, of assets. The framework in
Georgia is relatively new, entering its second regulatory period
from 2018 and the regulatory periods in Bulgaria can be relatively
short. In addition to historical tariff changes, the supply cost
pass-through element in Georgia leads to cash flow volatility.
Supported Power Generation: Hydro-based generation represents 35%
of EPas' EBITDA, most of which comes from plants selling power
under feed-in schemes, thus reducing price risk. Tariff support is
available for some plants in Bulgaria until 2024-2025 and in
Turkey until 2019-2020. Fitch takes a positive view of the support
mechanisms in Bulgaria and Turkey. This partially offsets EPas'
small size of operations and the regulation in Georgia (which
constrains revenue there). Partial generation deregulation in
Georgia is planned for 2018 and Fitch expects this will support an
increase in earnings. The Turkish generation business also
benefits from tariffs being determined in US dollars (with actual
payments in Turkish lira). However, FX risk remains a constraint
for EPas.
EBITDA Volatility: EPas' EBITDA has been volatile over the last
four years, ranging from EUR104 million in 2014 to EUR164 million
in 2016 on the back of variable hydrology conditions and tariff
changes. Fitch expects EBITDA to decline in 2017, due to lower
hydro generation in all three countries and temporary volume-
related volatility in the distribution business. However, Fitch
expects EBITDA to recover to 2013-2016 averages in 2018.
Positive Free Cash Flow: Fitch expects EPas to continue generating
healthy cash flow from operations on average of about EUR110
million over 2017-2021. The company expects to increase capex to
on average around EUR58 million over 2017-2020, from an average of
around EUR33 million over 2013-2016. The investment programme is
aimed at network upgrades in Georgia and medium- and low-voltage
grid upgrades in Bulgaria. Fitch forecast the company to remain
intrinsically (pre-dividend) free cash flow (FCF)-positive.
FX Exposure: The company is exposed to FX fluctuations as almost
all of its debt at end-2016 was denominated in currencies other
than the currencies in which the company generates revenue. The
majority of debt was from Czech Export Bank (about 61%), mainly to
fund the investment programme. In contrast, all its revenue is
denominated in the local currencies of the countries of operation,
although tariffs in Turkey are determined in US dollars and the
Bulgarian leva is pegged to the euro. EPas does not use any
hedging instruments, other than holding some cash in foreign
currencies. Fitch do not expect major changes to FX exposure with
the proposed refinancing.
Adjusted Debt Includes Guarantees: Fitch includes guarantees
issued by EPas or its subsidiaries for DK Holding or sister
companies within DK Holding group in the adjusted debt
calculations. Fitch views the forecast funds from operations (FFO)
connection-fee and guarantees adjusted net leverage on average of
about 4.3x over 2018-2021 as adequate for the current ratings.
Part of Larger Privately Owned Group: EPas is part of larger DK
Holding Investments s.r.o. (DK Holding) which is ultimately owned
by one individual; therefore, Fitch assesses key-person risk from
a dominant shareholder as higher than for most rated peers. DK
Holding also includes two hydro plants in the Czech Republic,
hydro development and construction projects in Turkey and a hydro
equipment production business in Slovenia. The latter two require
capex, which may be funded through dividends received from EPas,
as it is the major cash-generating subsidiary within DK Holding.
EPas expects its dividend policy to remain flexible and subject to
business needs.
EPas should remain within its internal target of net debt/EBITDA
of 3.5x and well within its proposed restricted payment and debt
incurrence covenants of 4.5x on or before 7 December 2019, 4x
after 7 December 2019 and on or before 7 December 2020 and 3.5x
thereafter. Fitch expects liquidity to be supported by comfortable
cash holding of EUR60 million. Fitch views these financial targets
as plausible, but Fitch adds guarantees from EPas group to other
DK Holding entities to its debt. Fitch expect one-off shareholder
distributions of EUR100 million as part of refinancing and other
one-off cash outflows in 2017, and Fitch expect dividends may be
close to zero in 2018 and about EUR15 million annually thereafter.
DERIVATION SUMMARY
EPas is smaller than other rated European utilities such as EP
Energy, a.s. (BB+/Stable), Energa S.A. (BBB/Stable) or Bulgarian
Energy Holding EAD (BB-/Stable), although it is one of the largest
utilities companies in Georgia (for example compared with Georgian
Water and Power LLC (BB-/Stable)) and Bulgaria. The company's
EBITDA was more volatile over 2013-2016 compared with many peers',
but it benefits from mostly neutral to positive FCF generation.
EPas' leverage is higher than EP Energy's and Energa's.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
- Bulgarian, Georgian and Turkey GDP growth of 2.5%-4.7% over
2017-2020;
- Bulgarian, Georgian and Turkey CPI of 1.2%-10.7% over 2017-
2020;
- Electricity generation to decline by about 19% yoy in 2017
before rising to 2013-2017 averages (cumulatively over all
regions in which EPas operates) from 2018;
- Capex close to management expectations of about EUR58 million
on average over 2017-2021;
- Dividends payments to the extent that cash remains at a
comfortable level of about EUR60 million; and
- EUR100 million shareholder distributions and other one-off
cash outflows in 2017 of around EUR50 million.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead
to Positive Rating Action
- Increased scale of operation, less volatile earnings, strong
track record of supportive regulation and reduction of FX
exposure.
- Improved funds from operations (FFO) adjusted net leverage
(excluding connection fees and including group guarantees)
below 3.5x on a consistent basis.
Future Developments That May, Individually or Collectively, Lead
to Negative Rating Action
- A reduction in profitability and cash generation, leading to
an increase in FFO adjusted net leverage (excluding connection
fees and including group guarantees) above 4.5x and FFO fixed
charge coverage below 4x on a consistent basis.
LIQUIDITY
Fitch views EPas' liquidity prior to refinancing as weak, but
manageable. At end-2016, EPas' short-term debt was EUR141 million
against cash and cash equivalents of EUR82 million, along with
unused credit facilities of EUR1.8 million. The company placed
notes at the holding company level to refinance the majority of
its debt at operating companies, except for working capital loans
at EP Georgia and loans from CEB to EP Bulgaria and EPas' hydro
generation business in Turkey. Fitch expects EPas' FCF to be
negative in 2017 and positive over 2018-2020; with an expected
cash balance of around EUR60 million, this will support its
liquidity profile.
FULL LIST OF RATING ACTIONS
- Long-Term Local and Foreign Currency IDR assigned at 'BB',
Stable Outlook
- Short-Term Local and Foreign Currency IDR assigned at 'B'
- Senior unsecured rating assigned at 'BB'
===========================
U N I T E D K I N G D O M
===========================
AUBURN SECURITIES 4: Fitch Affirms BB+ Rating on Class E Notes
--------------------------------------------------------------
Fitch Ratings has upgraded Auburn Securities 4 plc's class C notes
and affirmed five tranches, as follows:
Class A2: affirmed at 'AAAsf'; Outlook Stable
Class M: affirmed at 'AAAsf'; Outlook Stable
Class B: affirmed at 'AAAsf'; Outlook Stable
Class C: upgraded to 'AAAsf' from 'AAsf'; Outlook Stable
Class D: affirmed at 'A-sf'; Outlook Stable
Class E: affirmed at 'BB+sf'; Outlook Stable
The transaction was issued in 2004 consisting of residential and
buy-to-let (BTL) mortgages originated in the UK by Capital Home
Loans (CHL). CHL is a limited company engaged in the business of
originating, purchasing and selling residential mortgages in
England, Wales and Northern Ireland.
CHL was formed as a joint venture between Credit Foncier de France
(CFF) and Societe Generale (SG). In 1992 CFF bought out SG, and in
1996 Irish Life and Permanent (now Permanent TSB) acquired CHL
from CFF. CHL was sold to Promontoria (Landowne) Limited
(immediate parent undertaking), a company whose ultimate parent is
owned by certain investment funds managed and advised by Cerberus
Capital Management L.P on 31 July 2015.
KEY RATING DRIVERS
Healthy Asset Performance: Auburn 4 has shown strong performance,
with late stage arrears (loans with more than three monthly
payments overdue) decreasing to 0.18% of the current portfolio
balance as of end-September 2017 from their peak of 3.54% in April
2009. This compares favourably with the wider BTL market
performance, particularly post-2010. Given the current low
pipeline of late-stage arrears in the transaction, Fitch expects
possession activities and associated losses to remain minimal, as
reflected in the Stable Outlook across the structure.
Sufficient Credit Enhancement: Annualised gross excess spread in
Auburn 4 is 32bp of the outstanding pool balance. The fairly low
level of excess spread offers limited protection against period
losses and led to marginal reserve fund draws in the past year. As
there are currently no properties in possession, Fitch expects
future losses and reserve fund draws to remain minimal. The credit
enhancement available to the rated notes remains sufficient.
Unhedged Interest Rate Risk: Auburn 4's pool comprises loans
linked to CHL's standard variable rate (SVR; 2.04%) and to the
Bank of England base rate (BBR; 97.96%). The mismatch between the
interest rates paid on the portfolio and the 1-month Libor payable
on the notes is hedged through basis swaps where PTSB acts as swap
provider and guarantor. As PTSB is unrated, Fitch treats this
transaction as unhedged. In its analysis, Fitch applied further
stresses on the transaction by reducing the revenue generated by
the BBR mortgages. The analysis showed that the resulting
reduction in excess spread has no impact on the notes' ratings.
Interest-Only (IO) Concentration: The portfolio is characterised
by high and increasing IO concentration, which exposes the
transaction to the bullet repayment of 92.77% of the pool. The IO
concentration test has shown a low or no impact on the class A2,
M, B and C notes but slightly higher sensitivity for the class D
and E notes.
RATING SENSITIVITIES
Adverse macroeconomic performance could impact asset performance
and lead to a compression in excess spread (especially as the
transaction deleverages).
Predominantly IO pools are exposed to fluctuations in the
underlying interest rates, while also presenting balloon risk at
maturity
CARILLION PLC: Reaches Deal to Sell Part of UK Healthcare Unit
--------------------------------------------------------------
Reuters reports that troubled British construction firm Carillion
said on Dec. 13 it had reached a deal to sell a large part of its
UK healthcare facilities management business to outsourcing group
Serco, helping it cut its debt by GBP41.4 million.
Carillion, which has said it was heading towards a breach of debt
covenants and needed fresh capital, had said it would exit its UK
healthcare and Canadian businesses to help raise more than GBP300
million by the end of 2018 from disposals, Reuters relates.
According to Reuters, the sale, for about GBP47.7 million
(US$63.55 million), includes a portfolio of healthcare facilities
management contracts and related ancillary contracts and assets.
The firm said 15 sites would be transferred to Serco on a phased
basis, Reuters notes.
The firm had said in September said it intended to exit the
business and then announced it had a preliminary agreement for
selling a large part of it to Serco for GBP50.1 million, Reuters
recounts.
Carillion, as cited by Reuters, said net disposal proceeds of
GBP41.4 million would be used to prepay of part of a GBP140
million credit.
Analysts estimate Carillion's debts including provisions, pensions
and accounts payable at about GBP1.5 billion, Reuters notes.
Carillion is fighting for its survival after costly contract
delays and a downturn in new business at the company, which
handles major infrastructure projects for the British and other
governments, Reuters relays.
EUROSAIL 2006-1: S&P Affirms B-(sf) Rating on Class E Notes
-----------------------------------------------------------
S&P Global Ratings raised its ratings on five classes and affirmed
its ratings on three classes from Eurosail 2006-1 PLC. In
addition, S&P removed its ratings on three of the classes from
CreditWatch positive.
S&P said, "The rating actions follow our credit and cash flow
analysis of the most recent transaction information that we have
received as part of our ongoing surveillance. Our analysis
reflects the application of our European residential loans
criteria and our current counterparty criteria.
"On Oct. 17, 2017, we raised our long- and short-term issuer
credit ratings (ICRs) on Barclays Bank PLC, the transaction,
guaranteed investment contract (GIC) account provider and swap
counterparty.
"Consequently, on Nov. 10, 2017, we placed on CreditWatch positive
our ratings on Eurosail 2006-1 PLC's class A2c, B1a, and B1c
notes."
In the December 2012 investor report, the servicer (Acenden Ltd.)
updated how it reports arrears to include amounts outstanding,
delinquencies, and other amounts owed, including arrears of fees,
charges, costs, ground rent, and insurance. S&P has refined its
analysis of these other amounts owed by using the available
reported loan-level data. The new approach primarily results in a
lower weighted-average loss severity (WALS) in this transaction.
The pool factor (the outstanding collateral balance as a
proportion of the original collateral balance) in this transaction
is 16%.
Delinquencies in this transaction are above S&P's U.K. residential
mortgage-backed securities (RMBS) index. As a result, and combined
with the prospect of future interest rate rises and a
deteriorating economic environment in the medium term, S&P
projected additional delinquencies of 1.1% in our analysis.
The notes are currently amortizing sequentially, as the
transaction's pro rata arrears triggers were breached in June
2012, when 90-plus day amounts outstanding exceeded 22.5%. S&P
said, "We believe the transaction will continue to pay principal
sequentially, and we have incorporated this assumption into our
cash flow analysis. The sequential amortization, combined with a
nonamortizing reserve fund, has increased the transaction's
available credit enhancement since our previous review.
"Our weighted-average foreclosure frequency (WAFF) assumptions
have decreased since our previous review thanks to greater
seasoning and lower arrears level."
Rating level WAFF (%) WALS (%) Expected credit loss (%)
AAA 35.05 31.18 10.93
AA 30.39 24.77 7.53
A 25.62 14.79 3.79
BBB 21.48 9.88 2.12
BB 17.39 7.07 1.23
B 15.51 5.06 0.78
S&P said, "Based on the results of our cash flow analysis, we have
raised our ratings on the class A2c, B1a, and B1c notes to 'A
(sf)' from 'A- (sf)' and removed them from CreditWatch positive.
The notes could have achieved a higher rating without the
prevailing rating cap. The transaction and GIC account and swap
documentation rating triggers have been breached but not remedied
by Barclays Bank (in the case of the swap, no collateral is being
posted). Accordingly, our current counterparty criteria cap our
ratings on the notes in this transaction at 'A', which is the
long-term ICR on Barclays Bank.
"Our credit and cash flow analysis indicated that the available
credit enhancement for the class C1a and C1c notes is now
commensurate with higher ratings, so we have therefore raised our
ratings on the class C1a and C1c notes to 'BBB+ (sf)' from 'BB+
(sf)'.
"Our analysis also indicated that the available credit enhancement
for the class D1a, D1c, and E notes is commensurate with the
current ratings. Based on this, we have affirmed our ratings on
these classes of notes.
"Our credit stability analysis indicated that the maximum
projected deterioration that we would expect at each rating level
over one- and three-year periods, under moderate stress
conditions, is in line with our credit stability criteria."
Eurosail 2006-1 is a U.K. nonconforming RMBS transaction backed by
loans originated by Southern Pacific Mortgage Ltd. and Southern
Pacific Personal Loans Ltd.
RATINGS LIST
Eurosail 2006-1 PLC
EUR60.7 Million, GBP474.003 Million, US$437.5 Million
Mortgage-Backed Floating-Rate Notes
Class Rating
To From
Ratings Raised And Removed From CreditWatch Positive
A2c A (sf) A- (sf)/Watch Pos
B1a A (sf) A- (sf)/Watch Pos
B1c A (sf) A- (sf)/Watch Pos
Ratings Raised
C1a BBB+ (sf) BB+ (sf)
C1c BBB+ (sf) BB+ (sf)
Ratings Affirmed
D1a B (sf)
D1c B (sf)
E B- (sf)
EUROSAIL-UK 2007-1NC: S&P Ups Rating on Cl. D1a/D1c Notes to B
--------------------------------------------------------------
S&P Global Ratings took various credit rating actions on all rated
classes of notes in Eurosail-UK 2007-1NC PLC.
Specifically, S&P has:
-- Raised to 'A (sf)' from 'A- (sf)' and removed from
CreditWatch positive its ratings on the class A3a, A3c, B1a,
and B1c notes;
-- Raised to 'A (sf)' from 'BBB (sf)' its rating on the class
C1a notes;
-- Raised to 'B (sf)' from 'B- (sf)' its ratings on the class
D1a and D1c notes; and
-- Affirmed its 'B- (sf)' rating on the class E1c notes.
S&P said, "The rating actions follow our credit and cash flow
analysis of the most recent transaction information that we have
received as part of our ongoing surveillance. Our analysis
reflects the application of our European residential loans
criteria and our current counterparty criteria.
"On Oct. 17, 2017, we raised our long- and short-term issuer
credit ratings (ICRs) on Barclays Bank PLC, the guaranteed
investment contract (GIC) and transaction account provider in this
transaction (see "Prospective Barclays Ring-Fenced Entity Assigned
Preliminary 'A/A-1' Ratings, Barclays Bank PLC Raised To 'A/A-
1'"). Consequently, on Nov. 10, 2017, we placed on CreditWatch
positive our ratings on Eurosail 2007-1NC's class A3a, A3c, B1a,
and B1c notes."
In the December 2012 investor report, the servicer (Acenden Ltd.)
updated how it reports arrears to include amounts outstanding,
delinquencies, and other amounts owed. The servicer's definition
of other amounts owed include (among other items), arrears of
fees, charges, costs, ground rent, and insurance.
S&P has refined its analysis of these other amounts owed by using
the available reported loan-level data. The new approach primarily
results in a decrease in the weighted-average loss severity (WALS)
in this transaction.
The pool factor (the outstanding collateral balance as a
proportion of the original collateral balance) in this transaction
is 26%.
The notes in this transaction amortize sequentially, as the pro
rata conditions are not satisfied, including a cumulative losses
threshold of 1.5%. As the cumulative losses are currently at 5.4%,
the transaction will continue to pay sequentially. S&P has
incorporated this assumption in our cash flow analysis.
This transaction benefits from increased credit enhancement
compared with our previous review, due to a non-amortizing reserve
fund and the sequential amortization.
Rating WAFF WALS Expected
Level (%) (%) loss (%)
AAA 45.59 43.34 19.76
AA 40.42 35.94 14.53
A 34.85 23.72 8.27
BBB 30.56 17.20 5.26
BB 25.83 13.09 3.38
B 23.46 10.24 2.40
WAFF--Weighted-average foreclosure frequency.
WALS--Weighted-average loss severity.
S&P said, "Our current weighted-average foreclosure frequency
(WAFF) assumptions have decreased since our previous review,
primarily due to greater seasoning and lower arrears.
"Based on the results of our cash flow analysis, we have raised to
'A (sf)' from 'A- (sf)' and removed from CreditWatch positive our
ratings on the class A3a, A3c, B1a, and B1c notes. The notes could
have achieved a higher rating without the prevailing rating cap.
The transaction and GIC account documentation rating triggers have
been breached but not remedied by Barclays Bank. Accordingly, our
current counterparty criteria cap our ratings on the notes in this
transaction at 'A', which is the long-term issuer credit rating on
Barclays Bank.
"Our analysis also indicates that the available credit enhancement
for the class C1a, D1a, and D1c notes is commensurate with higher
ratings than those currently assigned. We have therefore raised
our ratings these classes of notes.
"Our cash flow modeling shows that the class E1c notes miss
interest payments or fail to repay principal by the final legal
maturity date under a 'B' stress scenario. Based on the fact that
we do not expect a default in the short term, we have affirmed our
'B- (sf)' rating on the class E1c notes.
"Our credit stability analysis for this transaction indicates that
the maximum projected deterioration that we would expect at each
rating level over one- and three-year periods, under moderate
stress conditions, is in line with our credit stability criteria."
This transaction is a U.K. nonconforming residential mortgage-
backed securities (RMBS) transaction, originated by Southern
Pacific Mortgage Ltd., Preferred Mortgages Ltd., London Mortgage
Company, Langersal No. 2 Ltd., and Southern Pacific Personal Loans
Ltd.
RATINGS LIST
Class Rating Rating
To From
Eurosail-UK 2007-1NC PLC
EUR552.15 Million, GBP357.3 Million Mortgage-Backed Floating-
Rate Notes, Excess-Spread-Backed Floating-Rate Notes
Ratings Raised And Removed From CreditWatch Positive
A3a A (sf) A- (sf)/Watch Pos
A3c A (sf) A- (sf)/Watch Pos
B1a A (sf) A- (sf)/Watch Pos
B1c A (sf) A- (sf)/Watch Pos
Ratings Raised
C1a A (sf) BBB (sf)
D1a B (sf) B- (sf)
D1c B (sf) B- (sf)
Rating Affirmed
E1c B- (sf)
GRAINGER PLC: S&P Alters Outlook to Positive on Improved Coverage
-----------------------------------------------------------------
S&P Global Ratings revised to positive from stable its outlook on
U.K.-based residential real estate company Grainger PLC. At the
same time, S&P affirmed its 'BB' long-term corporate credit rating
on the company.
S&P said, "We also affirmed our 'BBB-' issue rating on Grainger's
senior secured notes. The '1(95%)' recovery rating on these notes
remains unchanged, reflecting our rounded estimate of 95% recovery
in the event of default.
"The outlook revision reflects our view that Grainger's EBITDA
interest coverage ratio may strengthen more than we currently
anticipate as a result of further refinancing of higher-yielding
debt or stronger cash flow generation from the private rented
sector (PRS) business. We believe Grainger's financial risk
profile could improve closer to that of higher-rated peers that
enjoy solid EBITDA interest coverage of above 3x. In addition, we
believe that Grainger will progress on its plan to grow its PRS
business quicker than we previously anticipated and increase its
relative share of EBITDA generated by rental income versus income
from property sales when regulated tenancy units become vacant.
"Although we anticipate that Grainger will increase its overall
debt exposure to support its PRS growth, we believe that our ratio
of debt to debt plus equity will remain well below 50% and debt to
EBITDA below 13x in the next 12-24 months.
"Our assessment of Grainger's business risk profile is supported
by the solid market demand for U.K. residential real estate,
particularly in London and Southeast England, where about two-
thirds of Grainger's assets are located. We view the company's
market standing as the largest listed U.K. owner and trader of
residential real estate assets as supportive for our business risk
assessment. We also believe that Brexit impact should be limited
for Grainger, thanks to its broad tenant base and geographical
spread across the U.K.. The significant undersupply of housing in
the U.K. and the increasing proportion of renting versus home
ownership in the U.K. are also supportive. We believe that the
company will continue to generate profit on selling single-family
homes at strong market prices in the next 12-24 months.
"Our assessment of business risk also takes into account the
company's income mix. We view the income stream from trading sales
(which still represents most of total income) as more variable
than that from rental business and fees. Although vacancy rates
are relatively predictable in the trading business, they are not
contractually guaranteed. This is partially offset, in our view,
by Grainger's solid track record of generating profit on selling
single-family homes. Management announced plans last year to focus
more on rental income-producing investment properties and reducing
its reliance on property trading. We view this shift in strategy
as positive and have incorporated it in our business risk
assessment.
"Therefore, we anticipate that the company will continue to
generate positive cash flow, mainly from its trading business in
the next two years. But income generated from tenanted buildings
should increasingly be part of overall revenue generation.
"As of Sept. 30, 2017, Grainger's property portfolio amounted to
about GBP2.8 billion, including properties currently under
development, which we view as average in size compared with most
S&P Global Ratings-rated residential property companies in Europe.
Therefore, we expect economies of scale will remain limited. Given
that margins in the property trading business are lower than those
in property renting, we expect this will continue to weigh on the
company's overall EBITDA margin (about 40%-45%, compared with an
average of 60%-70% for rental property businesses in Europe).
Nevertheless, in line with its strategy and the focus on PRS, we
expect margins will increase gradually in the next couple of
years.
"Lastly, Grainger has very good asset diversity, and we view
positively its low level of development activities (about 5% of
portfolio value), as well as the use of joint ventures to spread
the risk on more capital-intensive projects.
"Our view of Grainger's financial risk profile reflects the
company's relatively small cash flow generation, which we consider
to be the main constraint on the corporate credit rating and
credit metrics. We view positively, however, management's
commitment to maintaining its target reported loan-to-value (LTV)
ratio of 40%-45%.
"We estimate Grainger's adjusted gross debt at approximately GBP1
billion for fiscal 2018 (year ending Sept. 30, 2018), which
translates into a ratio of debt to debt plus equity at a low 40%.
It treats about two-thirds of the properties in its portfolio as
inventories-trading property. This accounting treatment reflects
those properties at cost in Grainger's statutory balance sheet.
Given that house prices have been rising, the current value of
these assets is considerably higher than the reported figure.
Therefore, we add back to equity the market value uplift for
Grainger's trading properties and consider the ratio of debt to
debt plus equity (fair value) in our analysis of Grainger's credit
metrics.
"We also note the company's recent refinancing activities and
significant reduction in debt, due to the sale of its retirement
business and the disposal of its German assets. We assume that
this debt trimming and much lower leverage will be only temporary.
We expect that Grainger's debt will rise once again in the next
12-24 months as part of its funding strategy for the investment
program.
"Still, we view positively the reduction in the overall cost of
debt to below 4%.
"The positive outlook indicates that we may raise the ratings
within the next 12-24 months if the company is able to sustainably
maintain EBITDA interest coverage of above 3x, while keeping debt
to debt plus equity well below 50%. This could occur if the
company takes further advantage of the low interest rate
environment and refinances outstanding higher yielding debt or
enhances its cash flow generation more than we currently
anticipate, thanks to stronger overall rental income growth.
We would raise the rating if Grainger maintains an interest
coverage ratio above 3x and a ratio of debt to debt plus equity of
well below 50% on a sustainable basis. We consider that such a
step would follow either a further refinancing of debt or a major
increase in EBITDA generation."
In addition, an upgrade will also hinge on the company's ability
to execute its announced strategy of becoming a residential
landlord and increasing the cash flow proportion stemming from
holding properties against its trading business.
S&P said, "We might revise our outlook to stable if Grainger fails
to maintain an EBITDA interest coverage ratio of above 3x. In our
view, this could happen if rental income from the PRS activities
does not improve further. We would also view negatively a fall in
trading income caused by a severe drop in U.K. house prices or
higher financing costs for U.K. homebuyers."
HOUSE OF FRASER: Moody's Lowers CFR to Caa1, Outlook Negative
-------------------------------------------------------------
Moody's Investors Service has downgraded the Corporate Family
Rating (CFR) of House of Fraser (UK & Ireland) Limited (House of
Fraser, HoF, or the company) to Caa1 from B3 and its probability
of default rating (PDR) to Caa1-PD from B3-PD. Concurrently,
Moody's has downgraded the rating of the GBP165 million floating
rate notes due 2020, issued by House of Fraser (Funding) plc, to
Caa1 from B3. The rating outlook remains negative.
"Moody's downgrade of HoF reflects its weak results in the first
three quarters of its fiscal year have been weak, which was due to
both challenging market conditions and company specific factors,
notably in respect of disruption after the launch of a new web
platform and underperformance in House Brands. The negative
trajectory of profitability and resultant deterioration in already
weak credit metrics means that a B3 CFR is no longer appropriate,"
says David Beadle, a Moody's Vice President - Senior Credit
Officer and lead analyst for House of Fraser.
"Absent an unexpected general uptick in consumer demand, a
recovery in HoF's profitability is dependent upon either an
improvement in the company's product offering or in cost savings
initiatives, which each involve execution risks", he added.
RATINGS RATIONALE
House of Fraser's Caa1 CFR is constrained by (1) recent weaker
profitability, which has resulted in increased adjusted leverage
and low interest expense coverage; (2) its relatively limited
scale and high exposure to UK consumer discretionary spending
behaviour; (3) the seasonal reliance on its revolving credit
facility (RCF); and (4) the maturity profile of its capital
structure, with RCF and term loan both due in July 2019.
However, House of Fraser's rating continues to reflect the
company's (1) positive name recognition, known for providing a
premium department store offering and shopping experience; (2)
broad customer base, weighted towards affluent customers with
solid discretionary spending power; and (3) the historic strong
online growth and penetration. Furthermore, the typical earnings
volatility associated with pure-apparel retailers is diluted in
HoF's case due to the combination of (a) a diverse product range
which includes health and beauty, homeware and fashion accessories
(b) the mixture between in-house designs, products bought from
third-party brands and the use of concessions.
Moody's considers HoF's liquidity profile is weak as free cash
flow has been persistently negative and the rating agency believes
after the recent underperformance financial covenant headroom will
be tight. However, Moody's notes positively that HoF's majority
shareholder provided support via GBP20 million cash payments ahead
of the peak in working capital needs before the Christmas trading
period, with a further GBP5 million due to be received in the new
year. Of the GBP25 million total, GBP10 million is in respect of a
two-year licensing agreement for use of the HoF name and IP in
China and the remaining GBP15 million represents a reduction in
the balance of inter-company receivables.
STRUCTURAL CONSIDERATIONS
The GBP165 million senior secured FRN due 2020 are issued by HoF's
wholly-owned finance subsidiary House of Fraser (Funding) plc,
while Highland Acquisitions Ltd is the borrower in respect of the
GBP125 million senior term loan and the GBP100 million RCF both
due July 2019. All three debt tranches rank pari-passu and benefit
from security comprising substantially all assets of group
companies which must at all times represent at least 85% of group
assets and EBITDA.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the risk that if profitability does
not return towards the level recorded in previous fiscal years the
current capital structure may prove unsustainable.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on the rating is unlikely in the short term but in
due course could arise if the company showed signs of a
sustainable recovery in profitability such that a sustainably
adequate liquidity profile could be achieved.
Downward pressure on the rating could arise if HoF's profitability
declines further in the coming quarters, or in the event of a
deterioration in the company's liquidity profile.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail
Industry published in October 2015.
COMPANY PROFILE
House of Fraser (UK & Ireland) Limited is a private UK-based
department store chain focused on the retailing of premium
fashion, beauty and homeware products to an affluent customer
base. The company has approximately 7,000 employees and operates
58 stores in the UK and 1 in Dublin, Ireland.
HoF was acquired in the summer of 2014 by Chinese department store
chain Nanjing Cenbest (unrated) in a transaction which gave the
business an Enterprise Value of approximately GBP480 million. For
the fiscal year to 28 January 2017, HoF reported a gross
transaction value (GTV) of GBP1,310 million, Turnover of GBP836
million and EBITDA of GBP63.6 million.
NEW LOOK: Moody's Lowers CFR to Caa2, Outlook Negative
------------------------------------------------------
Moody's Investors Service has downgraded to Caa2 from Caa1 the
Corporate Family Rating (CFR) of UK apparel retailer New Look
Retail Group Limited (New Look or the company). Concurrently, the
rating agency has downgraded New Look's probability of default
rating (PDR) to Caa2-PD from Caa1-PD. Moody's has also downgraded
the ratings of the GBP700 million and the EUR415 million senior
secured notes due in July 2022 issued by New Look Secured Issuer
plc to Caa1 from B3 and the rating of the c. GBP177 million
outstanding senior unsecured notes due in July 2023 issued by New
Look Senior Issuer plc to Ca from Caa3. The outlook on all ratings
has changed to negative from stable.
"Moody's decision to downgrade New Look's ratings reflects Moody's
expectations that, after a particularly weak second quarter,
results in the second half of the company's fiscal year will also
fall well short of last year. Following changes to the senior
management team, New Look is seeking to refocus on its historic
value-based broad appeal. However this strategy will take time,
and the path towards a meaningful recovery in profitability is
uncertain. Therefore, the negative outlook on the company's
ratings reflects the risk that, despite the company's currently
adequate liquidity, the capital structure may in due course prove
unsustainable," says David Beadle, a Moody's Vice President -
Senior Credit Officer and lead analyst for New Look.
RATINGS RATIONALE
New Look's results for the first half of its fiscal year to March
2018 (FY18) fell short of Moody's previous expectations. The
rating agency now expects a further material year-on-year
deterioration in performance in the second half such that New
Look's reported EBITDA for FY18 will be in the region of GBP50
million. This is significantly lower than the GBP155 million
recorded in FY17, which already represented a sizeable fall from
the GBP227 million achieved in FY16. This severely depressed level
of profitability is insufficient to cover New Look's annual
interest expenses of around GBP75 million and underlying capex
requirements, which the rating agency estimates to be at least
GBP30 million a year. However, Moody's believes New Look's
liquidity remains adequate for the time being. The rating agency
positively notes the company started the fiscal year with cash of
over GBP70 million, and retains full access to its GBP100 million
revolving credit facility which remained undrawn at the half year.
Moreover, the company announced last month that agreement had been
reached with its core operational bank to increase bi-lateral
liquidity, trade and import facilities to GBP100 million on a
fully committed basis (subject to documentation and customary
conditions), from GBP78 million on an uncommitted and on demand
basis at the half year. Management report that relationships with
key suppliers remain strong with no changes to credit terms;
Moody's notes the importance for New Look's liquidity profile of
this remaining the case.
There have recently been a number of changes to New Look's
executive management team, most notably the departure of CEO
Anders Kristiansen at the end of August, after nearly five years
in the role, and the return of Alistair McGeorge as Executive
Chairman in November, a position he held for three years from
2011. The Founder, Tom Singh, has also once more taken an active
role on the product side, alongside Chief Product Officer, Roger
Wightman, who had previously announced a decision to step away
from executive duties. In the H1 results presentation, led by
McGeorge, bond investors were told that over the last couple of
years the company had alienated core customers by moving away from
the historic strategy of valued-based broad appeal, with products
becoming overly fashionable, young and edgy. Numerous other issues
were cited including: being late to some trends; lower flexibility
and speed; excessive product options; failure to clear previous
season stock quickly enough; and insufficient cost control. The
highly competitive market dynamics will have compounded these
self-inflicted problems. Moody's believes changes to strategy to
reposition products fashion content and value proposition will, if
successful, take time to gain traction and thus lead to an
improvement in sales and profitability. In the meantime, the
company will continue to face various challenges including
pressures on its cost base, notably in respect of the National
Living Wage, weak consumer sentiment in its core UK market, which
will limit demand for apparel, and highly competitive market
dynamics, particularly with respect to online specialists.
Moody's believes New Look's current capital structure will become
unsustainable if reported EBITDA remains less than GBP200 million
in the medium term. However, provided the revisions to strategy
can lead to a return to reported EBITDA of more than GBP100
million in FY19 the company should be able to maintain adequate
liquidity, subject to working capital remaining broadly neutral.
Thereafter, New Look would still have some time to grow back into
the current capital structure as it has no term debt maturities
until 2022.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative rating outlook reflects the risk that a failure to
achieve a meaningful recovery in profitability during the course
of 2018 could lead to a restructuring of New Look's current
capital structure within the next 12-18 months.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on the rating is unlikely in the short term but in
due course could arise if the company showed signs that a
sustainable recovery in profitability could be achieved and a
sustainable return to positive free cash flow was evident.
Downward pressure on the rating could arise if New Look's
liquidity deteriorated or if profitability does not show signs of
recovery during the course of 2018, or if the likelihood of a
default increased further.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail
Industry published in October 2015.
COMPANY PROFILE
Headquartered in London and Weymouth (with its registered office
in Weymouth, UK), New Look Retail Group Limited is a value fashion
retailer selling a range of apparel, accessories and footwear,
primarily for women. As at September 23, 2017, New Look operated
896 stores under the New Look brand: 596 directly-operated stores
in the UK; 84 stores in Europe (Ireland, France, Belgium and
Poland); 133 stores in China; and 83 franchise stores
(predominantly in the Middle East). In the last twelve months
ended September 23, 2017, New Look recorded revenues and reported
adjusted EBITDA of GBP1.42 billion and GBP92 million respectively.
Since June 2015 the business has been majority owned by South
African investment firm Brait SE. The family trusts of founder Tom
Singh and certain members of the management reinvested alongside
Brait.
SHOP DIRECT: Fitch Assigns Final 'B+' IDR, Outlook Stable
---------------------------------------------------------
Fitch Ratings has assigned Shop Direct Limited (SDL) a final Long-
Term Issuer Default Rating (IDR) of 'B+' with a Stable Outlook
following the completion of bond issuance and the receipt of final
documents. Fitch has also assigned Shop Direct Funding plc's
senior secured notes a final instrument rating of 'B+'/'RR4'.
The 'B+' IDR reflects management's track record of implementing a
coherent and successful strategy with limited execution risks,
leading to a robust business model with a solid presence in online
retail, and a commercial offer enabled by consumer finance. These
features, mitigated by moderate scale and limited geographic
diversification indicate a business profile commensurate with the
'BB' rating category.
The rating is constrained at 'B+' due to high Fitch-adjusted funds
from operations (FFO) net leverage of 5.0x at financial year-end
June 2017 (FYE17) and Fitch expectation of neutral to mildly
positive free cash flow (FCF). Fitch expects FFO adjusted net
leverage to stay around 5.1x by FYE19 and fall to 4.7x in FY21
under the assumption of improving sales and largely stable profit
margins despite the uncertainties around Brexit on consumer
confidence, FX and interest rates.
KEY RATING DRIVERS
Captive Client Base, Online Retail: SDL provides wholly owned
consumer financing as a complementary core offering to its online
general merchandise retail operations. Its profitable consumer
finance operations (from loans given to captive retail customers)
allow spending on operating, IT and marketing costs to support
retail sales volume growth in a symbiotic way. Fitch view this
feature as supportive of the company's superior business model but
it exposes the group to non-bank financial institution-type risks,
namely receivable asset quality through the economic cycle, and
funding/liquidity for that purpose.
Growing Very Offsets Declining Littlewoods: SDL has increased its
share of the UK retail market despite competition from traditional
retailers with increasing online presence and pure-play internet
providers (eg Amazon, ASOS and Boohoo). This is critically driven
by the success of Very. However, Fitch positive view of SDL's
market position is offset by management's conscious decision to
manage the decline of the Littlewoods brand, focusing on profit
and cash optimisation, and its concentrated presence in the UK's
highly competitive market with a number of innovations in retail
technology and ways of reaching customers.
Profitability Supported by Asset-Light Structure: SDL has solid
profitability adjusted for consumer financing based on Fitch
criteria relative to pure internet retailers of comparable scale.
SDL is capable of generating adequate profits and healthy FCF from
its inherently asset-light structure dominated mainly by
distribution centres and consumer interface technological
platforms. SDL also benefits from a relatively flexible cost
structure with variable costs representing around 66% of total
costs, which enables the company to maintain profits during
periods of volatility. In addition, the low use of operating
leases and a robust business profile support Fitch expectation of
strong FFO fixed charge cover ratio above 3.0x over the rating
horizon.
SDFC Funding and Liquidity Constraints: Most of the group's debt
is secured despite the strong cash-flow generation capabilities at
group level and the lack of meaningful debt maturities. The
encumbered nature of the assets reduces financial flexibility in
Fitch view, particularly at the Shop Direct Finance Company
Limited (SDFC) level.
Pricing Mitigates High Impaired Receivables: SDL's asset quality
is relatively weak, despite improving, as indicated by a four-year
average of impaired and non-performing loans of 11.2%, which
translates to a 'b'/'bb' rating for asset quality under Fitch's
non-bank financial institution criteria. This reflects SDL's
targeted customer base at the medium/lower end of the credit
spectrum and is mitigated by adequate pricing, reflecting a degree
of pricing power, and limited variability in SDL's asset quality
indicators since 2009. Risk management procedures, including
write-off and provisioning policies, are sound.
Sustainable Leverage Following Refinancing: Following the issuance
of GBP550million bonds, FFO adjusted net leverage (reflecting a
proxy of retail-only cash flows and Fitch-adjusted debt) is likely
to stay around 5.1x in FYE19 , and fall towards 4.7x in FY21
mainly due to improving sales and Fitch conservative view of
largely stable profit margins. However, this assumes a relatively
benign though subdued macroeconomic environment during Brexit, as
well as a maximum of GBP50 million to be distributed to
shareholders before September 2018 as indicated by management.
Such leverage is high but acceptable for the 'B+' rating given the
solid business profile.
Adjustments Follow Hybrid Business Model: In Fitch approach Fitch
make adjustments by stripping out the results of SDFC to achieve a
proxy for retail cash flows available to servicing debt at SDL. In
Fitch analysis Fitch also deconsolidate the GBP1.3 billion non-
recourse securitisation financing outside of the group under SDFC.
This securitisation debt is core to the group's consumer financing
offer and is repaid by the collection of receivables predominantly
originated from retail.
However, on the basis of Fitch view of below-average asset quality
and funding and liquidity constraints for SDFC, Fitch add back
GBP274 million of debt to SDL's retail operations. This is because
Fitch consider a hypothetical equity injection from the rated
entity to SDFC (GBP274 million) to attain a capital structure for
SDFC that would require no cash calls to support finance service
operations over the rating horizon. Fitch makes this theoretical
adjustment despite the fact that this business is financed on a
non-recourse basis via a receivables securitisation.
Some Commitment to Deleveraging: Management and the group's owners
may remain opportunistic about further shareholder distributions
in future, but Fitch assume that dividend distributions will
depend on future financial performance. SDL's governance
structures are weaker than those of its listed peers, with
concentrated ownership and some lack of transparency or
independent oversight.
This could translate into misalignment between shareholders and
creditors' interests over time. However, SDFC's board has three
non-executive directors among its six members. Fitch assess
financial transparency as adequate even though SDL conducts
related-party transactions with affiliate logistics entities Yodel
and Arrow XL. These contracts run until 2022, although they are on
an arm's-length basis.
DERIVATION SUMMARY
The asset base is inherently different from other traditional
retailers as over 50% of the group's consolidated total assets are
related to trade receivables. This compares with a 4% equivalent
figure for Marks and Spencer Group plc (BBB-/Stable) or 6% for New
Look Retail Group Ltd (CCC). Financial services income is driven
by the retail customer base, with over 95% of transactions made
with credit accounts (interest bearing or interest free).
The cost base is also different from that of traditional
retailers, with a focus on online retail operations and its client
base and without any meaningful fixed assets or operating leases.
This is reflected in a stronger EBITDAR-based profit margin
conversion into FCF after dividends. SDL's dedicated online retail
activities are largely made possible by consumer finance
operations via intra-group sale/purchase of receivables. This is
an unusual corporate business arrangement but it helps support the
company's commercial proposition.
SDL's product and service offering to clients is very compelling
relative to key competitor Amazon, Inc. or pure online fashion
retailers such as Boohoo and ASOS. SDL also benefits from an
efficient distribution infrastructure, with the lowest picking
costs and an established online platform without duplication of
costs/capex compared to M&S, New Look or other bricks-and-mortar
retailers with expanding online presence.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
- annual retail revenue growth rate averaging 3.2% by FY20 over
the rating horizon;
- retail-only EBITDA margin reaching 11.5% in FY18, then
gradually falling, reflecting weaker gross margin to help
recruit customers in a more subdued macroeconomic environment;
- capex/revenue ratio of around 4%;
- pension contribution of GBP15 million a year until 2021
recorded as other items before FFO;
- non-operating/non-recurring cash outflows mainly related to
distribution centres, debt refinancing;
- GBP50 million shareholder distribution assumed by Fitch in
FY18.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that SDL would be considered a going
concern in bankruptcy and that the company would be reorganised
rather than liquidated. Fitch has assumed a 10% administrative
claim.
Going-Concern Approach
Fitch follows a going-concern approach for its recovery analysis
as it expects a better valuation in distress than liquidating the
assets (and extinguishing the securitisation debt) after
satisfying trade payables. Fitch analysis focuses on a surviving
online retailer with consumer finance structured differently
(joint venture or owned by a third-party bank), and therefore a
corporate.
Fitch uses Fitch proxy retail-only EBITDA of GBP80.8 million
excluding marketing contribution from SDFC. Fitch also strips out
the GBP1.3 billion non-recourse securitisation financing outside
the group under SDFC as Fitch assume that consumer finance can be
arranged or structured by a third-party bank or in a joint venture
after restructuring.
Fitch applies an 8% discount to EBITDA, which results in
stabilised post-restructuring EBITDA of GBP74 million. Fitch uses
a 5.0x distressed enterprise value/EBITDA multiple, reflecting the
growing online retail and technology platform and competitive
position enabled by consumer finance, which mitigates the lack of
tangible asset support. Retail peers such as M&S conduct consumer
finance activities in a JV where financing is effectively provided
by external party bank.
Therefore in a hypothetical distressed situation a relatively
undamaged asset-light online retail brand with adjacent (instead
of core) consumer financing could realise 5.0x post-restructuring
EBITDA in Fitch's view.
For the debt waterfall, Fitch assumed a fully drawn super senior
revolving credit facility of GBP100 million and GBP4.3 million of
debt located in non-guarantor entities. This debt ranks ahead of
the bonds. After satisfaction of these claims in full, any value
remaining would be available for noteholders (GBP550 million) and
a GBP50 million pari passu revolving credit facility issued by
Shop Direct Funding plc. This translates into an instrument rating
for the bonds of 'B+'/'RR4'/38%.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead
to Positive Rating Action
- FFO adjusted net leverage (reflecting a proxy of retail-only
cash flows and Fitch-adjusted debt) consistently below 4.5x
(FY17: 5.0x)
- Improvement in the business model through increasing
diversification and scale, and a proven track record of
strategy implementation over the medium term, leading to a
retail-only FFO margin sustainably above 8% (FY17: 8.7%) and
continuing positive FCF generation through the cycle with FCF
margin in the low to mid positive single digits
- Significant improvements in asset-quality metrics translating
into improved profitability within SDFC
- Maintenance of solid FFO fixed charge cover and ample
liquidity cushion
Future Developments That May, Individually or Collectively, Lead
to Negative Rating Action
- Inability or lack of commitment to bring FFO adjusted net
leverage (as adjusted by Fitch) below 5.5x over the rating
horizon
- Weak business growth (neutral to mildly positive sales growth)
and profitability under more challenging market conditions in
the UK reflected in FFO margin below 7%
- Neutral to positive FCF before exceptional dividend
distributions over the rating horizon along with FFO fixed-
charge cover metrics below 3.0x
- Deterioration in SDL's asset quality negatively affecting its
SDFC profitability and cash flows, and ultimately its ability
to support its retail activities through SDFC's profitability
LIQUIDITY
Comfortable Liquidity: Sufficient availability exists under the
enlarged committed credit lines (GBP150 million) and headroom
under covenants to temporarily cover short-term liquidity
requirements for operational needs. SDL will benefit from a
comfortable level of liquidity comprising readily available cash
of GBP117 million as of FYE17 and Fitch expectation of at least
mildly positive FCF.
FULL LIST OF RATING ACTIONS
Shop Direct Limited
-- Long-Term IDR: 'B+'
Shop Direct Funding plc
-- Senior secured notes: 'B+/RR4'
TAURUS 2017-2: Fitch Assigns BB Rating to Class E Notes
-------------------------------------------------------
Fitch Ratings has assigned Taurus 2017-2 UK DAC's notes final
ratings as follows:
GBP164.5 million class A (ISIN XS1719092873): 'AAAsf'; Outlook
Stable
GBP100,000 class X: not rated
GBP53.2 million class B (ISIN XS1719093095): 'AA-sf'; Outlook
Stable
GBP33.7 million class C (ISIN XS1719093251): 'Asf'; Outlook
Stable
GBP51.8 million class D (ISIN XS1719093335): 'BBBsf'; Outlook
Stable
GBP44.7 million class E (ISIN XS1719093418): 'BBsf'; Outlook
Stable
The transaction is a securitisation of 95% of a single GBP367.25
million commercial real estate loan advanced to entities related
to Blackstone Real Estate Partners by Bank of America Merrill
Lynch International Limited. The loan is backed by a portfolio of
127 multi-let light industrial/logistics assets located throughout
the UK.
KEY RATING DRIVERS
The final ratings are based on Fitch's assessment of the
underlying collateral, available credit enhancement and the
transaction's sound legal structure.
Granular Portfolio: The portfolio benefits from a diverse array of
tenants (with more than one 1,000 unique tenants) and no
significant geographic concentration. Therefore exposure to
idiosyncratic factors affecting a particular industry, tenant or
region is limited. This is reflected favourably in Fitch's
property scoring.
Secondary Property Quality: Secondary properties are scored down
by Fitch, but there is little that Fitch consider at risk of
obsolescence. While the vast majority are more than 30 years old
they are generally fit for purpose. Properties located in or near
populated areas may enjoy higher barriers to entry for new supply
of similar stock, which tend to be expensive to deploy. This is
evidenced by an estimated rebuild cost almost double the market
value.
Pro-Rata Principal Pay: Prior to loan default, principal
(including property release amounts) is repaid to all noteholders
pro rata. If the borrower sells stronger assets more quickly, this
would leave notes exposed to a poorer quality, more concentrated
subset of properties. This risk is mitigated by initial portfolio
granularity and homogeneity, while its impact is cushioned by a
10% release premium. Allocated loan amounts also vary slightly by
certain proxies for property quality, such as occupancy.
Last Mile Distribution Demand: The need for logistics operations
that are near to consumers to facilitate same-day delivery is
growing rapidly. This is driving up demand for so called "last
mile" logistics properties. Well-located light industrial
buildings in this portfolio can be used as the final step in a
supply chain network.
KEY PROPERTY ASSUMPTIONS (all by market value)
'BBsf' weighted average (WA) cap rate: 7.5%
'BBsf' WA structural vacancy: 13%
'BBsf' WA rental value decline (RVD): 4.5%
'BBBsf' WA cap rate: 8%
'BBBsf' WA structural vacancy: 14.4%
'BBBsf' WA rental value decline: 6.5%
'Asf' WA cap rate: 8.6%
'Asf' WA structural vacancy: 15.8%
'Asf' WA rental value decline: 9.3%
'AAsf' WA cap rate: 9.3%
'AAsf' WA structural vacancy: 17.2%
'AAsf' WA rental value decline: 13.3%
'AAAsf' WA cap rate: 10%
'AAAsf' WA structural vacancy: 22.7%
'AAAsf' WA rental value decline: 18.5%
RATING SENSITIVITIES
The change in model output that would apply if the capitalisation
rate assumption for each property is increased by a relative
amount is as follows:
Current ratings - class A/B/C/D/E: 'AAAsf'/'AA-
sf'/'Asf'/'BBBsf'/'BBsf'
Increase capitalisation rates by 10% class A/B/C/D/E:
'AA+sf'/'A+sf'/'A-sf'/'BB+sf'/'Bsf'
Increase capitalisation rates by 20% class A/B/C/D/E:
'AA+sf'/'Asf'/'BBBsf'/'BBsf'/'CCCsf'
The change in model output that would apply if RVD and vacancy
assumption for each property is increased by a relative amount is
as follows:
Increase RVD and vacancy by 10% class A/B/C/D/E: 'AA+sf'/'AA-
sf'/'Asf'/'BBBsf'/'BBsf'
Increase RVD and vacancy by 20% class A/B/C/D/E/F:
'AA+sf'/'A+sf'/'A-sf'/'BBB-sf'/'BB-sf'
The change in model output that would apply if the capitalisation
rate, RVD and vacancy assumptions for each property is increased
by a relative amount is as follows:
Increase in all factors by 10% class A/B/C/D/E:
'AA+sf'/'Asf'/'BBB+sf'/'BB+sf'/'Bsf'
Increase in all factors by 20% class A/B/C/D/E/F: 'AA-
sf'/'BBB+sf'/'BBB-sf'/'BB-sf'/'CCCsf'
* UK: Non-Conforming RMBS 90+ Day Delinquencies Slightly Improve
----------------------------------------------------------------
The 90+-day delinquencies of the UK non-conforming (NC)
residential mortgage-backed securities (RMBS) market decreased
slightly to 9.6% in September 2017, from 10.9% in June 2017,
according to the latest performance update published by Moody's
Investors Service ("Moody's").
The rate of cumulative losses decreased slightly to 2.4%, from
2.6% over the same period.
The weighted-average periodic loss severity decreased to 23.9% in
September 2017, from 27.3% in June 2017.
Moody's annualised total redemption rate moderately decreased to
10.8% in September 2017, from 11.1% in June 2017.
As of September 2017, Moody's rated 83 transactions in the UK NC
RMBS market, with an outstanding pool balance of GBP18.7 billion.
For the latest ratings activity, please refer to Related Research
tab of the UK Non-conforming residential mortgage-backed
securities report.
*********
Monday's edition of the TCR delivers a list of indicative prices
for bond issues that reportedly trade well below par. Prices are
obtained by TCR editors from a variety of outside sources during
the prior week we think are reliable. Those sources may not,
however, be complete or accurate. The Monday Bond Pricing table
is compiled on the Friday prior to publication. Prices reported
are not intended to reflect actual trades. Prices for actual
trades are probably different. Our objective is to share
information, not make markets in publicly traded securities.
Nothing in the TCR constitutes an offer or solicitation to buy or
sell any security of any kind. It is likely that some entity
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public debt and equity securities about which we report.
Each Tuesday edition of the TCR contains a list of companies with
insolvent balance sheets whose shares trade higher than US$3 per
share in public markets. At first glance, this list may look like
the definitive compilation of stocks that are ideal to sell short.
Don't be fooled. Assets, for example, reported at historical cost
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assets. A company may establish reserves on its balance sheet for
liabilities that may never materialize. The prices at which
equity securities trade in public market are determined by more
than a balance sheet solvency test.
Each Friday's edition of the TCR includes a review about a book of
interest to troubled company professionals. All titles are
available at your local bookstore or through Amazon.com. Go to
http://www.bankrupt.com/booksto order any title today.
*********
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-
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Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante,
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Editors.
Copyright 2017. All rights reserved. ISSN 1529-2754.
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