/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/190507.mbx T R O U B L E D C O M P A N Y R E P O R T E R E U R O P E Tuesday, May 7, 2019, Vol. 20, No. 91 Headlines C R O A T I A CROATIAN BANK: Moody's Alters Outlook on Ba2 Rating to Positive ULJANIK: Chinese Company Shows Interest in Shipyard D E N M A R K [*] DENMARK: Corporate Bankruptcies Climb to 966 in April 2019 G E R M A N Y [*] GERMANY: Finance Minister Questions EU Bank Rescue Rules I R E L A N D MAYO RENEWABLE: Liquidator Finalizes Deal to Sell Assets VOYA EURO II: Fitch Gives 'B-(EXP)sf' Rating on Class F Debt VOYA EURO II: Moody's Gives '(P)B3' Rating on EUR9.15MM F Notes I T A L Y ALITALIA SPA: PM Extends Deadline to Submit Bids to June 15 L U X E M B O U R G ALTICE LUXEMBOURG: S&P Rates EUR2.8-Bil. Secured Notes 'B-' N E T H E R L A N D S ROYAL KPN: Fitch Affirms 'BB+' Sub. Debt Rating, Outlook Stable S E R B I A SERBIA: Fitch Affirms 'BB' Long-Term IDRs, Outlook Stable T U R K E Y TURKEY: Fitch Affirms 'BB' Long-Term IDR, Outlook Negative U N I T E D K I N G D O M ELLI INVESTMENTS: Fitch Lowers LT IDR to 'D' on Planned Assets Sale FOUR SEASONS: Administration Won't Affect Cumberland Care Homes NEPTUNE ENERGY: Moody's Alters Outlook on Ba3 CFR to Positive - - - - - ============= C R O A T I A ============= CROATIAN BANK: Moody's Alters Outlook on Ba2 Rating to Positive --------------------------------------------------------------- Moody's Investors Service has affirmed Croatian Bank for Reconstruction & Development's foreign currency long-term issuer and Backed Senior Unsecured MTN ratings at Ba2 and (P)Ba2, respectively, and changed the outlook to positive from stable. The rating action follows the affirmation of the Croatian government's issuer rating at Ba2 and outlook change to positive from stable. The sovereign rating action reflected Croatia's improving fiscal metrics on the back of a prudent policy stance and the recent implementation of reforms that will benefit its growth prospects. RATINGS RATIONALE According to Moody's, the affirmation of HBOR's ratings and change of outlook to positive follows the similar rating action on the Croatian government's ratings, and is based on the full, explicit and unconditional guarantee provided by the Government of Croatia for HBOR's liabilities. HBOR's ratings are therefore aligned with those of the Government of Croatia reflecting the full risk transfer of the guarantor. The rating agency notes that HBOR is fully government-owned, has a development mandate and its operations are closely monitored by the Croatian government and parliament. Its ratings also recognise its robust capital buffers that partly mitigate the elevated asset risks stemming from its policy role and modest profitability. Furthermore, although HBOR has a high reliance on market funding, this is mainly term funding from multilateral development agencies, which largely mitigates refinancing risks. WHAT COULD MOVE THE RATINGS UP/DOWN HBOR's issuer rating would move in tandem with the rating of the government of Croatia given its policy mandate, its full government ownership and state guarantee. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Government-Related Issuers published in June 2018. FULL LIST OF AFFCTED RATINGS Issuer: Croatian Bank for Reconstruction & Development. Affirmations: Long-term Issuer Rating, Affirmed Ba2, Outlook Changed To Positive From Stable Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba2 Outlook Action: Outlook Changed To Positive From Stable ULJANIK: Chinese Company Shows Interest in Shipyard --------------------------------------------------- Cruise Industry News reports that officials from China Shipbuilding Industry Corporation (CSIC) have arrived in Croatia for meetings with Prime Minister Andrej Plenkovic and executives at Uljanik shipyard to discuss the future of the yard. Hu Wenming, chairman of CSIC, said that the Croatian prime minister had delivered a very detailed presentation of the situation, and that CSIC will "seriously consider" the yards, Cruise Industry News relays, citing local press reports. Potential suitors for Uljanik have ranged from Brodosplit and Fincantieri to Scenic, which is building the Scenic Eclipse and has now led to potential Chinese investors, Cruise Industry News discloses. The Croatian government has not yet backed any restructuring plan for Uljanik due to financial burdens, as the yard has faced turmoil for the past year, Cruise Industry News notes. According to Cruise Industry News, the Croatian financial agency, FINA, has demanded courts open bankruptcy proceedings against the yard, with a decision expected shortly. ============= D E N M A R K ============= [*] DENMARK: Corporate Bankruptcies Climb to 966 in April 2019 -------------------------------------------------------------- Frances Schwartzkopff at Bloomberg News reports that corporate bankruptcies more than doubled last month in Denmark after authorities forced the closure of businesses that failed to identify their real owners. The development comes as Denmark cracks down on companies that don't identify who owns them, and coincides with intensified efforts to fight tax evasion and money laundering, Bloomberg notes. The campaign to go after shell companies is required by European regulations, Bloomberg states. Bankruptcies climbed to 966 in April from 441 a year earlier, Bloomberg relays, citing Statistics Denmark. According to Bloomberg, the statistics agency said in a statement less than a fourth of those shuttered were active businesses. Of the 966 companies, just 214 had employees or a turnover of more than DKK1 million (US$150,000), accounting for 97% of lost turnover and jobs, Bloomberg discloses. The Danish Business Authority said last month despite an intensive notification campaign, around 2% of companies in 2018 alone failed to register their real owners, Bloomberg recounts. The authority said it's now taken the step of going to probate court to have the companies closed, Bloomberg notes. ============= G E R M A N Y ============= [*] GERMANY: Finance Minister Questions EU Bank Rescue Rules ------------------------------------------------------------ Birgit Jennen at Bloomberg News reports that Deputy Finance Minister Joerg Kukies says at an event in Berlin that it's unclear whether EU banking rules set up in the aftermath of the collapse of Lehman Brothers would be able to handle troubles at a large lender. According to Bloomberg, European business models for banks would make more sense if progress was made on banking and capital markets union. There needs to be "considerable progress" on risk reduction for EU savings guarantees project to move forward, Bloomberg states. The EU adopted Bank Recovery and Resolution Directive (BRRD) in spring 2014 to provide authorities with arrangements to deal with failing banks at national level we as well as tackle cross-border banking failures, Bloomberg recounts. ============= I R E L A N D ============= MAYO RENEWABLE: Liquidator Finalizes Deal to Sell Assets -------------------------------------------------------- Gavin Daly at The Sunday Times reports that the liquidator to the bust Mayo Renewable Power, which planned to build a EUR200 million biomass plant, is finalizing a deal to sell the company's assets to its original backers, potentially signalling a revival of the project. According to The Sunday Times, Michael McAteer, the Grant Thornton liquidator to the business, is in exclusive talks with a company owned by American investor Gerald Crotty and businessman Michael Ronayne to take over the assets on a going concern basis. In a liquidation update, Mr. McAteer said he hoped to conclude a deal by the end of this month, The Sunday Times relates. It is understood a sale of the part-completed project was expected much sooner but has been delayed by regulatory approvals and licensing requirements, The Sunday Times notes. VOYA EURO II: Fitch Gives 'B-(EXP)sf' Rating on Class F Debt ------------------------------------------------------------ Fitch Ratings has assigned Voya Euro CLO II Designated Activity Company expected ratings as follows: Class X: 'AAA(EXP)sf'; Outlook Stable Class A: 'AAA(EXP)sf'; Outlook Stable Class B-1: 'AA(EXP)sf'; Outlook Stable Class B-2: 'AA(EXP)sf'; Outlook Stable Class C: 'A(EXP)sf'; Outlook Stable Class D: 'BBB-(EXP)sf'; Outlook Stable Class E: 'BB-(EXP)sf'; Outlook Stable Class F: 'B-(EXP)sf'; Outlook Stable Subordinated notes: 'NR(EXP)sf' The assignment of final ratings is contingent on the receipt of final documents conforming to information already reviewed. The transaction is a cash flow collateralised loan obligation of mainly European senior secured obligations. Net proceeds from the issuance of the notes will be used to fund a portfolio with a target of EUR400 million. The portfolio is managed by Voya Alternative Asset Management LLC . The CLO features a 4.5-year reinvestment period and a 8.5-year weighted average life. KEY RATING DRIVERS 'B' Portfolio Credit Quality Fitch expects the average credit quality of obligors to be in the 'B' category. The Fitch-weighted average rating factor of the current portfolio is 32.7, below the indicative covenanted maximum of 34.5. High Recovery Expectations At least 90% of the portfolio comprises senior secured obligations. Recovery prospects for these assets are typically more favourable than for second-lien, unsecured and mezzanine assets. The Fitch-weighted average recovery rating of the identified portfolio is 69.3%, which is above the indicative covenanted minimum of 64.25%. Diversified Asset Portfolio The transaction will include Fitch test matrices corresponding to different top 10 obligor concentration limits. The transaction also includes various other concentration limits, including the maximum exposure to the three largest Fitch-defined industries in the portfolio at 40% with 17.5% for the top industry. These covenants ensure that the asset portfolio will not be exposed to excessive concentration. Portfolio Management The transaction has a 4.5-year reinvestment period and includes reinvestment criteria similar to other European transactions. Fitch's analysis is based on a stressed-case portfolio with the aim of testing the robustness of the transaction structure against its covenants and portfolio guidelines. Cash Flow Analysis Fitch used a customised proprietary cash flow model to replicate the principal and interest waterfalls. This was also used to test the various structural features of the transaction, as well as to assess their effectiveness, including the structural protection provided by excess spread diverted through the par value and interest coverage tests. Recovery Rate to Secured Senior Obligations For the purpose of Fitch's Recovery Rate calculation, in case no recovery estimate is assigned, Fitch senior secured loans with a revolving credit facility limit of 15% will be assumed to have a strong recovery. For senior secured bonds, recovery will be assumed at 'RR3'. The different treatment in regards to recovery is on account of historically lower recoveries observed for bonds and that RCFs typically rank pari passu with loans but senior to bonds. The transaction features an RCF limit of 15% to be considered while categorising the loan or bond as senior secured. RATING SENSITIVITIES A 25% default multiplier applied to the portfolio's mean default rate, and with this increase added to all rating default levels, would lead to a downgrade of up to two notches for the rated notes. A 25% reduction in recovery rates would lead to a downgrade of up to three notches for the rated notes. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY The majority of the underlying assets have ratings or credit opinions from Fitch and/or other Nationally Recognised Statistical Rating Organisations and/or European Securities and Markets Authority-registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information. Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. VOYA EURO II: Moody's Gives '(P)B3' Rating on EUR9.15MM F Notes --------------------------------------------------------------- Moody's Investors Service announced that it has assigned the following provisional ratings to notes to be issued by Voya Euro CLO II Designated Activity Company: EUR2,250,000 Class X Senior Secured Floating Rate Notes due 2032, Assigned (P)Aaa (sf) EUR248,000,000 Class A Senior Secured Floating Rate Notes due 2032, Assigned (P)Aaa (sf) EUR28,275,000 Class B-1 Senior Secured Floating Rate Notes due 2032, Assigned (P)Aa2 (sf) EUR10,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2032, Assigned (P)Aa2 (sf) EUR26,300,000 Class C Senior Secured Deferrable Floating Rate Notes due 2032, Assigned (P)A2 (sf) EUR22,850,000 Class D Senior Secured Deferrable Floating Rate Notes due 2032, Assigned (P)Baa3 (sf) EUR24,000,000 Class E Senior Secured Deferrable Floating Rate Notes due 2032, Assigned (P)Ba3 (sf) EUR9,150,000 Class F Senior Secured Deferrable Floating Rate Notes due 2032, Assigned (P)B3 (sf) Moody's issues provisional ratings in advance of the final sale of financial instruments, but these ratings only represent Moody's preliminary credit opinions. Upon a conclusive review of a transaction and associated documentation, Moody's will endeavour to assign definitive ratings. A definitive rating (if any) may differ from a provisional rating. RATINGS RATIONALE The rationale for the ratings is based on a consideration of the risks associated with the CLO's portfolio and structure as described in its methodology. The Issuer is a managed cash flow CLO. At least 90% of the portfolio must consist of senior secured obligations and up to 10% of the portfolio may consist of senior unsecured obligations, second-lien loans, mezzanine obligations and high yield bonds. The portfolio is expected to be 70% ramped as of the closing date and to comprise of predominantly corporate loans to obligors domiciled in Western Europe. The remainder of the portfolio will be acquired during the six month ramp-up period in compliance with the portfolio guidelines. Voya Alternative Asset Management LLC will manage the CLO. It will direct the selection, acquisition and disposition of collateral on behalf of the Issuer and may engage in trading activity, including discretionary trading, during the transaction's four and half-year reinvestment period. Thereafter, subject to certain restrictions, purchases are permitted using principal proceeds from unscheduled principal payments and proceeds from sales of credit impaired obligations or credit improved obligations. Interest and principal amortisation amounts due to the Class X Notes are paid pro rata with payments to the Class A Notes. The Class X Notes amortise by 12.5% or EUR281,250 over the first 8 payment dates starting on the 2nd payment date. In addition to the eight classes of notes rated by Moody's, the Issuer will issue EUR33,724,000 of Class M-1 Notes and EUR626,000 of Class M-2 Notes which will not be rated. An amount equivalent to 0.35 per cent. per annum of the Aggregate Collateral Balance as of the first day of such Due Period will be used to either redeem Class M-2 or to pay interest on Class M-2. 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. Methodology underlying the rating action: The principal methodology used in these ratings was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in March 2019. Factors that would lead to an upgrade or downgrade of the ratings: The rated notes' performance is subject to uncertainty. The notes' performance is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The collateral manager's investment decisions and management of the transaction will also affect the notes' performance. Moody's modeled the transaction using CDOEdge, a cash flow model based on the Binomial Expansion Technique, as described in Section 2.3 of the "Moody's Global Approach to Rating Collateralized Loan Obligations" rating methodology published in March 2019. Moody's used the following base-case modeling assumptions: Par Amount: EUR 400,000,000 Diversity Score: 43 Weighted Average Rating Factor (WARF): 2925 Weighted Average Spread (WAS): 3.65% Weighted Average Coupon (WAC): 5.5% Weighted Average Recovery Rate (WARR): 45% Weighted Average Life (WAL): 8.5 years Moody's has addressed the potential exposure to obligors domiciled in countries with local currency ceiling (LCC) of A1 or below. As per the portfolio constraints and eligibility criteria, exposures to countries with LCC of A1 to A3 cannot exceed 10% and obligors cannot be domiciled in countries with LCC below A3. ========= I T A L Y ========= ALITALIA SPA: PM Extends Deadline to Submit Bids to June 15 ----------------------------------------------------------- Reuters reports that Italy's deputy prime minister Luigi Di Maio extended a deadline for the submission of bids for the ailing carrier Alitalia to June 15, a government statement said on May 3. The decision followed a request from Italy's state railway group Ferrovie dello Stato, which is one of the companies who said it is willing to contribute to the rescue plan, Reuters notes. The current deadline had expired at the end of April, Reuters states. The government is arranging a rescue of the ailing company to avoid mass layoffs and has lined up Ferrovie dello Stato and U.S. carrier Delta as potential investors, Reuters discloses. But it still needs another investor to contribute to a bid that is estimated to be worth around EUR1 billion (US$1.1 billion), according to Reuters. Flagship carrier Alitalia has been run by administrators since 2017 after workers rejected a previous rescue plan, Reuters relays. Rome-based Alitalia has been the recipient of a GBP789 million state loan and has been looking for international partners to keep it in business, BBC discloses in a separate report. =================== L U X E M B O U R G =================== ALTICE LUXEMBOURG: S&P Rates EUR2.8-Bil. Secured Notes 'B-' ----------------------------------------------------------- S&P Global Ratings said that telecom group Altice Europe N.V. (B/Negative/--) will see improved free operating cash flow (FOCF), but no material change in its leverage and free cash flow metrics as a result of its proposed EUR1.8 billion debt repayment (EUR1 billion at Altice France S.A. and EUR800 million at Altice Luxembourg SA) and EUR2.8 billion of new issuance at Altice Luxembourg SA to refinance its 2022 bonds. S&P's 'B' ratings and negative outlook on the group remain unchanged. S&P said, "We assigned a 'B-' issue rating to Altice Luxembourg's proposed notes. The recovery rating on its senior secured debt remains '5' (recovery estimate: 10%). Altice France's proposed EUR1 billion debt repayment slightly improves senior secured recovery prospects to 65% from 60%. The issue rating remains unchanged at 'B' with a recovery rating of '5'. "The debt repayment does not change our view on Altice Europe's overall financial risk profile. Compared with our previous expectations, we estimate that the transaction will increase Altice Europe and Altice France's adjusted FOCF from 2019 by about EUR110 million and EUR59 million, respectively, on a run-rate basis. "We expect no adjusted leverage benefit at Altice Europe, since we were already netting the cash from our adjusted debt, and only modest deleveraging at Altice France by about 0.2x." ALTICE LUXEMBOURG RECOVERY ANALYSIS Altice Luxembourg's proposed EUR2.8 billion-equivalent senior secured notes have 'B-' issue and '5' recovery ratings. The 'B-' issue rating on Altice Luxembourg's existing senior secured notes is unchanged. Despite the accompanying EUR800 million of partial debt repayment, which modestly improves recovery prospects, the recovery rating is unchanged at '5', reflecting S&P's expectation of modest (10%-30%; rounded estimate: 10%) recovery prospects in the event of a default. KEY ANALYTICAL FACTORS -- Under S&P's hypothetical default scenario, it assumes that Altice France S.A. and Altice International S.a.r.l. are unable to upstream sufficient cash to service Altice Luxembourg's senior secured notes interest, due to a prolonged operating underperformance. -- S&P thus anticipates that in an event of interest payment default, Altice Luxembourg would sell its stake in Altice International to repay its debt and that there would be sufficient equity value left, after reimbursing Altice International creditors, for recovery prospects of at least 10% for Altice Luxembourg's noteholders. -- S&P's 'B-' issue rating and '5' recovery rating reflect the senior secured notes' reliance on dividends from its operating sub-groups SFR and Altice International to service its own debt, as well as their subordination to Altice Luxembourg's EUR200 million super senior revolving credit facility (RCF) and all the indebtedness of the guarantors (all subsidiaries). -- The recovery prospects are slightly improved following the EUR800 million 2022 notes partial repayment, but remain below 15%, and reflect Altice International's perimeter change, asset disposals (100% of the Dominican Republic and 75% of the Portuguese towers) and lower EBITDA base (about 12% decline year-on-year, pro forma the new perimeter). SIMULATED DEFAULT ASSUMPTIONS -- Year of default: 2022 -- Jurisdiction: Luxembourg SIMPLIFIED WATERFALL -- Gross proceeds from Altice International's equity value: about EUR1.1 billion -- Administrative costs: 5% -- Net value available to debtors: EUR1.0 billion -- Super senior RCF[1]: about EUR176 million -- Secured debt claims[1]: about EUR6.0 billion -- Recovery expectation[2]: 10% (recovery rating: 5) [1]All debt amounts include six months of prepetition interest. RCF assumed 85% drawn on the path to default. [2]Rounded down to the nearest 5%. ALTICE FRANCE RECOVERY ANALYSIS KEY ANALYTICAL FACTORS -- S&P's 'B' issue and '3' recovery ratings on Altice France's existing senior secured debt and term loans remain unchanged. S&P's recovery estimate is, however, slightly higher at 65% following the proposed EUR1 billion partial debt repayment under the 2024 bonds. -- The recovery prospects on SFR's existing senior secured debt and term loan recovery estimate are modestly increasing to 65%, from 60%, following the proposed EUR1 billion partial debt repayment of the 2024 bonds. S&P's issue and recovery ratings are unchanged at 'B' and '3'. -- The recovery prospects remain constrained by the substantial amount of equally ranked secured debt, the significant amount of prior-ranking facilities (including non-guarantor debt and securitization programs), as well as the disposal of a minority stake in its tower and to-be-built medium and low density area fiber asset. -- S&P continues to view the security and guarantee package as adequate, because it comprises pledges over obligors and guarantors' shares, intellectual property rights, bank accounts, and business of NC Numericable S.A.S. and SFR, among others. It is also supported by very strong guarantor coverage (greater than 90% of the group's EBITDA), and is subject to annual testing, although it excludes the network assets. -- S&P views the documentation as relatively issuer-friendly in terms of credit protection. There is no maintenance covenant on the senior secured debt, except a springing maximum 4.25x consolidated net secured leverage under the RCF (to be tested at each drawdown). Restrictions on additional indebtedness are subject to incurrence-based net leverage tests: 3.25x for consolidated senior secured debt leverage and 4.0x for consolidated total net leverage. The documentation allows for cash to be up-streamed equal to the amount required by Altice Luxembourg for the payment of its scheduled interest (under its senior secured notes and super senior RCF), including sizable payment carve-outs. -- S&P said, "Under our hypothetical default scenario, we envision a combination of intense mobile and fixed-line competition from better-capitalized competitors, a continued deterioration of customer care and subsequent sustained customer losses, which are not offset by SFR's investments in content and capital intensity. In our default scenario, this would lead to a payment default in or before 2022." -- S&P values SFR as a going concern, given its solid market position in France as the second-largest mobile and leading high-speed broadband player, its significant product and customer diversity, and its valuable infrastructure network assets. SIMULATED DEFAULT ASSUMPTIONS -- Year of default: 2022 -- Minimum capex (percentage of last three years' average sales): 6% -- Cyclicality adjustment factor: +0% (standard sector assumption) -- Operational adjustment: +20% (minimum capex further adjusted to reflect minimum capex at about 9%) -- Emergence EBITDA after recovery adjustments: about EUR2.2 billion -- Implied enterprise value multiple: 6x -- Jurisdiction: France SIMPLIFIED WATERFALL -- Gross enterprise value at default: about EUR13.5 billion -- Administrative costs: 5% -- Net value available to debtors: EUR12.8 billion -- Priority claims[1]: about EUR1.1 billion -- Secured debt claims[1]: about EUR17.0 billion -- Recovery expectation[2]: 65% (recovery rating: 3) [1]All debt amounts include six months of prepetition interest. RCF assumed 85% drawn on the path to default. [2]Rounded down to the nearest 5%. ===================== N E T H E R L A N D S ===================== ROYAL KPN: Fitch Affirms 'BB+' Sub. Debt Rating, Outlook Stable --------------------------------------------------------------- Fitch Ratings has affirmed Netherlands-based Royal KPN N.V.'s Long-Term Issuer Default Rating and senior unsecured rating at 'BBB'. The Outlook on the IDR is Stable. KPN is the Dutch incumbent telecoms operator offering fixed-line/broadband, mobile and pay-TV services with strong market positions in both consumer and B2B (business-to-business) segments. Fitch projects KPN's FFO adjusted net leverage to remain comfortable for its rating level and significantly below its downgrade threshold supported by capex discipline and improving financial performance on the back of its EUR 350 million cost-cutting program. Additional financial flexibility is provided by a 3.5% minority stake it holds in Telefonica Deutschland (BBB/Positive) (as of end-1Q19). KEY RATING DRIVERS Strong Market Positions: Fitch expects KPN to maintain its strong market positions in both the mobile and fixed-line/broadband segments, supported by its strategy to accelerate fiber deployment, and to continue with infrastructure upgrades. KPN has maintained its wired broadband market share at close to 40%. It is the largest mobile operator in the country with a subscriber retail market share at above 30% at end-1H18, as estimated by Telecommonitor. Premium Strategy: KPN is keen to position itself as a premium operator, which may allow it to command stronger pricing power and lead to growth in average revenue per user. The company is making significant investments to ensure high quality of its network that is capable of provid ing premium services. KPN is going to make its mobile network fully 5G -ready by end-2021. The company plans to build an additional 1 million fiber-to-the-home household connections by end-2021 , taking the total to 3.4 million, and covering more than 40% of households in the Netherlands. Unbundled, Mobile-Only Services Vulnerable: Fitch projects KPN's retail revenue to remain in the modestly negative territory, due to pressure from declining fixed-line unbundled and mobile-only services. While the company is making good progress in migrating its customer base to bundled offers with higher ARPU, the total number of serviced households in 1Q19 declined 4% yoy and the total count of revenue generating units shrank by 3.4% yoy. Non-bundled customers accounted for a quarter of KPN's total household base at end-1Q19, and are likely to continue churning away. The company's consumer mobile subscriber base declined 6% yoy at end-1Q19, with post-paid customers demonstrating higher loyalty as their numbers shrank only 1.3% yoy. B2B Under Pressure: The business-to-business segment is likely to remain under moderate pressure over the next couple of years, hit by declining revenue from legacy products. Strong growth in IT and other services is likely to be insufficient to compensate for weakness in communication revenue (down 7.6% yoy in 1Q19). Business customers are migrating en-masse to IP-based solutions, with voice-over-IP ARPU only a fraction of traditional fixed-voice ARPU (EUR11 vs. EUR49 respectively in 1Q19). Margins Sustainably Higher: Fitch expects KPN's profitability to become sustainably stronger, supported by an ambitious cost-cutting programme to reduce net indirect operating costs by EUR350 million at end-2021. The company is going to significantly reduce its workforce and has identified a few legacy platforms that can be discontinued or simplified. The targeted savings are substantial at 6 .2% of 2018 revenue. The net impact on EBITDA growth is likely to be more moderate, due to continuing revenue challenges. More Cost-Cutting Likely: Fitch believes the company retains a potential to continue with the second wave of additional cost savings in the more distant future, which would be margin -accretive. KPN has received regulatory clearance to start switching off its legacy PSTN network, which may pave the way for further network simplification and a leaner operating model. Capex Discipline: KPN's plans to increase the share of capex on infrastructure upgrades within a constant capex amount support the company's longer-term competitiveness, in its view. The company committed itself to EUR 1.1 billion of annual capex till end-2021. Strong Cash Flow: Fitch expects KPN to be able to maintain strong cash flow generation, with a pre-dividend free cash flow margin in the low single-digit territory on average in the medium-term. This will be under temporary pressure from restructuring expenses that are likely to be front-loaded, leading to lower FCF generation in 2019 and, to a lesser extent, in 2020. Moderate Leverage: Fitch expects KPN's leverage to remain comfortable, at slightly above 3x funds from operations adjusted net leverage (3x at end-2018), providing sufficient headroom within the current rating level. Fitch projects the company's deleveraging flexibility to be supported by improving EBITDA generation on the back of ongoing cost-cutting and healthy organic cash flow. One-off Offset: Leverage will be modestly pushed up by two rounds of spectrum payments that it expects in 2020 and 2021. However, this may be mitigated by if the company retains proceeds from the sale of its remaining shares in Telefonica Deutschland (BBB/Positive). The company held a 3.5% stake in the latter operator at end-1Q19. Taxes to Rise: KPN's FFO and FFO-based metrics are likely to be modestly weakened once the company begins paying higher income taxes. KPN continues to benefit from a tax shield created by the divestment of its mobile operations in Germany - the company only paid EUR 9 million of cash income taxes in 2018. The deferred tax asset from netted tax losses and other carry forwards including unrealised liquidation losses was reported at EUR594 million at end-2018, a reduction from the EUR902 million reported at end-2017. DERIVATION SUMMARY The ratings of KPN reflect its strong domestic market positions, but also intense infrastructure-based competition in the Netherlands in the face of a full bundle-enabled operator, VodafoneZiggo Group B.V. (B+/Stable), on a cable network with a significant revenue market share. KPN's domestic market is more competitive than certain other European markets with limited or regional cable competition such as Italy or Germany. The company is rated one notch lower than its larger peers such as Orange S.A. (BBB+/Stable) and Deutsche Telekom AG (BBB+/Stable) with comparable leverage, due to its smaller scale, lower geographic diversification and a more challenging competitive environment. KPN can sustain higher leverage within its rating compared with equally-rated but operationally weaker or less diversified operators such as NOS, S.G.P.S., S.A. (BBB/Stable) or Telefonica Deutschland Holding AG (BBB/Positive). KEY ASSUMPTIONS - Revenue in the consumer and B2B segments to decline 2% or less in 2019, before stabilising in the medium-term but with B2B lagging - Improving EBITDA margin supported by the EUR350 million cost-cutting programme - Significant front-loaded restructuring charges in 2019-2021, cumulatively equal to slightly above one year of expected annual cost savings of EUR350 million - Recurring capex (excluding spectrum) in line with company guidance of EUR 1.1 billion per annum - Spectrum investments in 2020 and 2021 - Modestly growing dividends RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Revenue and EBITDA growth across all divisions combined with a strengthened operating profile and competitive capability - Expectations of FFO-adjusted net leverage sustainably below 3.0x Developments That May, Individually or Collectively, Lead to Negative Rating Action - Deterioration in KPN's operations that result in declining EBITDA - Expectations of FFO-adjusted net leverage remaining above 3.5x on a sustained basis - Aggressive shareholder remuneration policy that is perceived by Fitch not to be in line with the company's operating risk profile LIQUIDITY AND DEBT STRUCTURE Sufficient Liquidity: KPN had EUR644 million of cash and cash-like assets at end-2018, excluding EUR24 million relating to the contracted sale of iBasis. This is supported by an untapped EUR 1.25 billion revolving credit facility with a maturity in July 2023. Additionally, in early 2Q19 the company signed a European Investment Bank facility of EUR300 million available for mobile network investments. KPN's debt maturity profile is well-spread out with annual redemptions at or below EUR1 billion per annum. Royal KPN N.V. - LT IDR Affirmed at BBB - Senior unsecured; LT Affirmed at BBB - Subordinated; LT Affirmed at BB+ =========== S E R B I A =========== SERBIA: Fitch Affirms 'BB' Long-Term IDRs, Outlook Stable --------------------------------------------------------- Fitch Ratings has affirmed Serbia's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BB'. The Outlook is Stable. KEY RATING DRIVERS Serbia's 'BB' rating reflects governance and human development indicators that compare favourably with the peer group medians, and the IMF Policy-Coordination Instrument provides a near-term policy anchor for further strengthening of macroeconomic fundamentals and reduction in public debt. Set against these factors are Serbia's lower GDP growth potential, higher public debt, greater share of foreign-currency denominated debt, and higher net external debt relative to the peer medians. The current account deficit, at 5.2% of GDP, is also wider than the 'BB' median of 2.3% (partly reflecting a low savings rate of 13.2% of GDP) although it has been fully covered by strong FDI flows in recent years. Fitch forecasts a moderation in GDP growth this year to 3.1%, from 4.3% in 2018 due to a slowdown in key trading partners, and the absence of one-off factors that contributed to last year's rebound in activity. Domestic demand, including strong investment growth, remains the driver, supported by employment growth (up 2.4% yoy in March), higher wage growth (partly due to this year's 8.6% minimum wage hike), strong FDI flows, more favourable credit conditions, and a slight fiscal loosening. Weaker external demand will weigh on growth, notably from Germany and Italy, Serbia's two largest export markets. Fitch forecasts GDP growth of 3.0% in 2020, as softer employment growth is compensated by some recovery in external demand. GDP growth has averaged 2.0% over the last five years, compared with the 'BB' median of 4.2%, and unfavourable demographics and weak total factor productivity growth contribute to Serbia's lower growth potential. There has been a consolidation of the improved macroeconomic performance of recent years, underpinned by the IMF PCI (in place since July 2018 and which followed the 2015-2018 IMF Standby Arrangement). Inflation expectations remain well anchored and the main policy rate has been unchanged at 3.0% since April last year. HICP inflation edged up to an average 2.4% in 1Q19, from 2.0% in 4Q18, and it forecasts a moderate rise to the National Bank of Serbia (NBS) central inflation target of 3.0% towards end-2020. The RSD/EUR exchange rate has largely been flat this year, as it was in 2018. Net FX purchase by the NBS have been around EUR0.1 billion this year, compared with the EUR1.6 billion last year that helped stem appreciation pressures (from higher portfolio inflows and the improved macroeconomic environment). Fitch forecasts a 0.4pp worsening of the general government balance in each of the next two years, to 0.2% of GDP in 2019 and -0.2% in 2020. This is within the government's fiscal target of -0.5% of GDP for both years, and compares favourably with the 'BB' current median of a 2.7% deficit. The moderate fiscal loosening is driven by somewhat greater expenditure on capital investment, wage and pensions, and a reduction in employer social security contributions. It follows a large fiscal consolidation effort since 2014, when the general government deficit was 6.2% of GDP (including a reduction in spending on wages and pensions of 3.5% of GDP and in debt interest costs of 0.7%). There is less certainty about fiscal policy beyond 2020 when the IMF PCI expires, but it considers the risk of a more marked loosening is mitigated by the relatively high political priority the government continues to attach to fiscal discipline. General government debt is on a downward path, which it forecasts at 48.8% in 2020 from 54.5% in 2018 (and a peak of 71.2% in 2015) but this still compares unfavourably with the projected 'BB' median of 43.7%. Fitch does not incorporate any stock-flow adjustments, for example proceeds from the privatisations planned under the IMF programme. Under its longer-term debt projections, which assume average GDP growth of 2.8% from 2019-2028 and a slightly reduced primary surplus averaging 1.1% of GDP, general government debt declines steadily to 40.0% in 2028. Serbia's debt structure is more exposed to foreign-currency risk than peers; the FX-denominated share in total debt fell to 73.8% last year from 77.0% at end-2017, but remains above the current 'BB' median of 60.0%. Fitch expects the current account deficit to widen by 0.3pp in 2019 to 5.5% of GDP due to lower export volume growth, consumption recovery and robust investment growth lifting imports, and a higher net primary income deficit. Fitch forecasts the deficit to narrow to 5.0% in 2020 as external demand recovers. Net FDI reached 7.5% of GDP in 2018 (having increased by around 1pp in each of the previous two years), and it expects it to reduce to an average 5.2% of GDP in 2019-2020, still covering the current account deficit. Risks are also mitigated by the high capital and export-orientated content of imports. Fitch forecasts a small reduction in international reserves to 4.3 months of current external payments, from 4.5 in 2018 (similar to the current 'BB' median of 4.2) and for net external debt/GDP to increase by 3.9pp in 2018-2020 to 26.4% (above the current peer median of 19.1% of GDP). Serbia's structural reform has been much slower than the macroeconomic adjustment of recent years. The IMF PCI provides some momentum, with its focus on structural measures particularly in areas of governance. Earlier progress had been made in lowering contingent liabilities from state-owned enterprises, including last year's privatisation of the RTB Bor Copper Mine, and annual budget subsidies to SOEs fell to 1.1% of GDP in 2018 from 2.2% in 2016. Reforms to reduce inefficiencies in the public sector wage system have been postponed to next year, while other areas targeted include improving weak corporate governance in public entities and furthering tax administration efforts. Substantial structural reform progress represents an upside risk to Serbia's medium-term GDP growth potential. Fitch anticipates broad continuity in policy and governance. There have been widespread political protests against the government since last December centred on issues of rule of law and media freedom, but in its view, opposition parties remain fragmented and President Vucic is well placed to continue in power. On the issue of EU membership, the government continues to work towards the target accession date of 2025 but progress has slowed, with the chapters on rule of law and Kosovo the most problematic. Relations with Kosovo are severely strained, with 100% tariffs on Serbian exports still in place and little sign of a compromise on a potential land swap agreement. Serbia's banking sector remains well-capitalised (Tier 1 capital ratio of 22.3%) and there was some further reduction in the NPL ratio to 5.7% in 4Q18, from 7.8% six months earlier (and 21.6% in 2015). Lending growth is strong, at 12.2% yoy in December, particularly consumer lending. Progress in addressing weaknesses in state-owned banks (which account for 16% of total banking sector assets) remains mixed, and includes the planned privatisation of Komercijalna Banka, Serbia's third-largest bank, targeted for later this year. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Serbia a score equivalent to a rating of 'BB+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Macroeconomics: -1 notch, to reflect relatively weak medium-term growth potential due to structural rigidities, including adverse demographics, the large and inefficient public sector, relatively high unemployment, a large informal economy, low savings rate, and aspects of the business environment and administrative capacity that hinder productivity. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within its criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The following factors may, individually or collectively, result in positive rating action: - An improvement in medium-term growth prospects without creating macro-economic imbalances, for example due to structural reform progress. - Further reduction in the government debt-to-GDP ratio. - Greater confidence that recent improvements in macroeconomic stability, including reduced external vulnerabilities, will be sustained. The following factors may, individually or collectively, result in negative rating action: - Rising government debt/GDP, for example due to a significant fiscal loosening and/or weaker GDP growth. - A recurrence of exchange rate pressures leading to a fall in reserves and a sharp rise in debt levels and interest burden. - Worsening of external imbalances leading to increased external liabilities. KEY ASSUMPTIONS - Global macroeconomic developments are in line with Fitch's Global Economic Outlook (March 2019). - Fitch assumes that EU accession talks will remain an important policy anchor. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'BB'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'BB'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'B' Short-Term Local-Currency IDR affirmed at 'B' Country Ceiling affirmed at 'BB+' Issue ratings on long-term senior unsecured debt affirmed at 'BB' =========== T U R K E Y =========== TURKEY: Fitch Affirms 'BB' Long-Term IDR, Outlook Negative ---------------------------------------------------------- Fitch Ratings has affirmed Turkey's Long-Term Foreign-Currency Issuer Default Rating at 'BB' with a Negative Outlook. KEY RATING DRIVERS Turkey's rating and Negative Outlook reflect weak external finances, manifest in a large external financing requirement, low foreign reserves and high net external debt, high inflation, a track record of economic volatility, and political and geopolitical risks. The rating is supported by strong public finances, a large and diversified economy with a vibrant private sector, and GNI per capita and human development indicators above the peer group medians. The economy is adjusting to a sharp depreciation of the lira in 2018, which stemmed from the materialisation of external financing vulnerabilities, aggravated by political and geopolitical developments. The rapid correction in the current account deficit is a necessary step on the path towards rebalancing and stabilisation. However, significant uncertainties remain around the outlook for economic recovery and inflation, economic policy implementation, and the impact on the public finances and banking sector. The external sector remains a major credit weakness. There has been a significant adjustment of the current account, driven by import compression and supported by services exports and underpinned by the floating exchange rate. On a rolling six-month basis, the current account posted a surplus of USD2.7 billion at end-February, compared with a deficit of USD32 billion a year earlier. Gross foreign exchange reserves (including gold) rose by USD7 billion in the first two months of 2019, but fell to USD96.3 billion in March ahead of elections, with the decline particularly sharp in net terms (to around USD28 billion), possibly reflecting efforts to keep the exchange rate stable ahead of the polls. Market concerns about the reserves position appear to have contributed to a renewed fall in the lira, which could add to dollarisation pressures. Weak domestic demand and a further improvement in services exports are forecast to underpin a current account deficit of 0.7% of GDP in 2019 (the smallest since 2002), less than projected net FDI inflows (1.2% of GDP). Gradual private sector deleveraging should also continue; at end-February, external debt rollover by banks was 80% and 93% for the non-bank private sector on a rolling six-month basis, reflecting reduced demand for FX as well as higher borrowing costs. Nonetheless, the external financing requirement will remain large due to private sector debt repayments. Fitch estimates the total external financial requirement (including short-term debt) at USD173 billion in 2019, down from USD212 billion in 2018. The financing requirement means Turkey will remain vulnerable to global investor sentiment and financial conditions, domestic political and economic policy uncertainty and a pronounced deterioration in relations with the US. Fiscal performance has been hit by the weak economy. In 1Q19 the central government deficit was TRY36.2 billion (0.8% of projected full-year GDP) up from TRY20.4 billion in 1Q18, despite a TRY42.9 billion jump in non-tax revenues due to the early payment of the central bank dividend. Pre-election stimulus measures affected both tax revenues (up only 5.8%) and primary expenditure (up 33.5%). The government did not revise its fiscal targets (notably a 2019 deficit of 1.8% of GDP) or include new measures in its updated economic reform plan, despite the tough first quarter and an optimistic growth assumption of 2.3%. Fitch assumes policy will be tightened as election-related stimulus rolls off and other consolidation measures are implemented, but forecasts the targets are missed with a central government deficit of 2.4% of GDP in 2019 (general government deficit of 3.1%). A rebound in the economy will lift revenues in 2020, narrowing the general government deficit to a forecast 2.7% of GDP. The moderate level of gross general government debt (GGGD) is forecast to remain a key rating strength. Fitch expects GGGD/GDP to rise to 31% at end-2019 from 30.4% at end-2018 owing to the widening of the fiscal deficit and assuming 0.5% of GDP support for state banks. This is well below the forecast median for 'BB' peers of 45.1%. GGGD/GDP is expected to decline to 30.2% in 2020. Fitch's projections do not include further sovereign support for the banks. Exchange rate volatility poses a risk to debt dynamics; 47% of central government debt was FX-denominated at end-February. Various discretionary policy measures were implemented ahead of local elections in March. While the government has fiscal space for counter-cyclical policies, the nature of some measures, notably interventions in the food retail market and ramped-up lending by state banks and reported pressure on private sector pricing policy risk creating distortions if maintained and raise questions over the broader policy stance. The new economic reform plan published shortly after the elections did not refer to these policy measures and lacked detail, but did provide approximate timelines for individual initiatives. Some of the structural measures in the plan have been welcomed by the private sector, particularly reforms to the insolvency process and politically difficult pension and severance pay reform. The post-election period could be more conducive to economic reform that would begin to tackle long-standing structural weaknesses, although Fitch remains cautious about the prospect of meaningful progress. Tough operating conditions continue to put pressure on the banking sector. NPLs (loans overdue by 90+ days, solo basis) were 4.1% in April, up from 3% at end-2017; Stage 2 loans - which could migrate to NPLs as the loans season - rose to 11.7% in February from 4.4% at end-2017, albeit partly reflecting IFRS9 implementation. Downside risks to asset quality remain significant given operating environment pressures. Capital adequacy remains above the regulatory requirement, at 16.4% at end-March and Fitch's stress tests show that pre-impairment profit and capital buffers provide a significant cushion against a potential marked deterioration in asset quality, a weakening in profitability and potential Turkish lira depreciation. In April, the government injected TRY24 billion of euro-denominated additional Tier 1 capital (equal to around 0.5% of GDP) into the state banks. This followed fairly rapid growth at these banks - in contrast to the rest of the sector - in 1Q19. Some private banks have also raised new capital. Refinancing risks for Turkish banks remain high following recent heightened market volatility and given the large stock of short-term external debt on banks' balance sheets (end-2018: USD90 billion on a remaining maturity basis). However, Fitch estimates banks' total external FC debt due within 12 months, net of more stable sources of funding, to be USD40 billion-USD45 billion compared with available foreign currency liquidity of USD75 billion-USD80 billion. Turkey is undergoing a deep economic recession, but the economy seems to have bottomed after contracting 4% (non-annualised) in 2H18, with net trade the main source of sequential growth. Election-related temporary stimulus and rapid credit growth from state-owned banks have also contributed to the nascent 1Q19 recovery, pointing to a likely easing of momentum in 2Q, particularly if accompanied by tighter fiscal policy. Base effects mean that yoy growth rates will remain negative until 4Q and the economy is forecast to contract by 1.1% this year. The unemployment rate has risen rapidly. Growth should revive in 2020, but at a forecast 3.1% will be below Fitch's estimate of trend growth (4.3%, recently revised down from 4.8%). Average growth for 2018-2020 of 1.5% compares with an average for 2010-2017 of 6.8%. Inflation has dipped from its peak, but remained elevated at 19.7% in March. Weak domestic demand and base effects should put inflation on a downward path, but the PPI remains high (29.6%) and the impact of unwinding temporary tax and other price control measures is unclear. Fitch forecasts inflation to average 14.2% in 2019, the highest of any sovereign rated above the 'B' category. The policy rate was kept at 24% in April and is rising in real terms. High dollarisation and the increased role of state bank lending and informal pressure on bank interest rates may be undermining transmission channels. In Fitch's view, monetary policy credibility is weak and potential mis-steps are a downside risk to the economic adjustment path. Political and geopolitical risks weigh on Turkey's ratings, and World Bank governance indicators are below the 'BB' median. Tolerance of dissenting political views has reduced in the opinion of independent observers. The opposition alliance won several key cities in local elections in March (the ruling AKP is contesting a narrow defeat in Istanbul), benefiting from the weak economy and a disciplined approach to the campaign. The elections completed a prolonged electoral cycle and the next polls are not scheduled for more than four years. Domestic security conditions have improved recently. In Fitch's view, geopolitical risks arise from Turkey's complex and at times volatile international relations. There are a number of pressure points in relations with the US, most prominently the government's planned purchase of S400 missiles from Russia; sanctions would be triggered by the arrival of missile components in the country. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Turkey a score equivalent to a rating of 'BBB-' on the Long-Term Foreign-Currency (LT FC) IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - External finances: -1 notch, to reflect a very high gross external financing requirement and low international liquidity ratio. - Structural features: -1 notch, to reflect an erosion of checks and balances, a weakening banking sector and the risk of developments in foreign relations that could impact financial stability. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within its criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that, individually, or collectively, could lead to a downgrade are: - Failure to rebalance and stabilise the economy consistent with lower inflation and external vulnerabilities. - Heightened stresses in the corporate or banking sectors potentially stemming from a sudden stop to capital inflows or a more severe recession. - A marked increase in the government debt/GDP ratio to a level closer to the peer median. - A serious deterioration in the domestic political or security situation or international relations. The main factors that, individually, or collectively, could lead to a stabilisation of the Outlook are: - A sustainable rebalancing of the economy evidenced by a reduction in the current account deficit and inflation that reduces external vulnerabilities. - A political and security environment that supports a pronounced improvement in key macroeconomic data KEY ASSUMPTIONS Fitch forecasts Brent Crude to average USD65/b in 2019 and USD62.5/b in 2020. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'BB'; Outlook Negative Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Negative Short-Term Foreign-Currency IDR affirmed at 'B' Short-Term Local-Currency IDR affirmed at 'B' Country Ceiling affirmed at 'BB+' Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'BB Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'BB+' Issue ratings on Hazine Mustesarligi Varlik Kiralama Anonim Sirketi's foreign-currency global certificates (sukuk) affirmed at 'BB Issue ratings on Hazine Mustesarligi Varlik Kiralama Anonim Sirketi's local-currency global certificates affirmed at 'BB+' =========================== U N I T E D K I N G D O M =========================== ELLI INVESTMENTS: Fitch Lowers LT IDR to 'D' on Planned Assets Sale ------------------------------------------------------------------- Fitch Ratings has downgraded UK care homes operator Elli Investments Ltd's Long-Term Issuer Default Rating to 'D' from 'C'. Concurrently, the agency has affirmed Elli Finance Plc's senior secured instruments at 'CC' with a Recovery Rating of 'RR3' (59%, reduced from 70%). Fitch also has affirmed Elli's super senior facility rating at 'CCC'/'RR1' (100%) and senior unsecured notes at 'C'/'RR6' (0%). The rating downgrade to 'D' follows Elli's announcement on April 30, 2019 to appoint independent administrators for the issuers of Elli's bonds and starting an independent sales process, which the group expects to complete by December 2019. Elli has indicated that its operating entities, which do not form a direct part of the administration proceedings, will continue to operate, but Fitch highlights that visibility over performance and liquidity is limited. This is because it expects that Elli's operations will require continued access to financing, which so far has been provided by existing lenders at arm's length. Hence at present, Fitch is unable to provide a forward-looking rating assessment in the absence of a revised capital structure and future business plan. KEY RATING DRIVERS Continued Operational Challenges: Fitch believes Elli continues to face constraints on profitability and cash flow generation. This is due to pressures on the group's cost base associated with the increase in the national living wage and a shortage of nurses in the UK, leading to increasing reliance on agency workers. Although the social care levy introduced by the UK treasury to increase funding for care has been adopted by the majority of local authorities and led to a moderate increase in fee rates, these so far have been insufficient to fully restore Elli's profitability. Sector Uncertainty Issues : Sector uncertainty remains in the absence of social care reforms. Despite positive underlying secular trends such as increasing demand for care and greater differentiation of the care model, long-term visibility over social care in the UK remains uncertain due to a chronic funding gap, which so far has not been politically addressed and hence makes the formulation of long-term strategies and business plans, as well as asset valuations in the sector difficult. Fitch expects the political debate around social care to intensify in 2H19, accelerated also by the administration of Elli as a leading player in the sector. Lower Recovery for Senior Secured Notes: Fitch's recovery assumptions are underpinned by valuations of Elli's properties given the group's asset-heavy strategy, despite limitations on repurposing these properties for alternative use in light of regulatory oversight. Based on its updated recovery assumptions and a gradual increase of the super senior tranche size, Elli Finance Plc's senior secured instruments continue to reflect above-average recoveries at 'RR3' (59%). This updated recovery analysis has not affected the instrument ratings on the senior and junior debt tranches and Fitch has affirmed the super senior facility rating at 'CCC'/'RR1'/100% and its senior unsecured notes at 'C'/'RR6'/0%. DERIVATION SUMMARY Fitch continues to observe significant pressures on ratings in the UK leveraged care home sector, which has been affected by a reduction of local authorities' fee rates in real terms, with profitability undermined by increasing costs predominantly as a result of the increase in the national living wage and increased use of agency workers. This has led to impaired profitability across the sector as cost inflation could not be passed on to payers, which now threatens the underlying business model of operators and makes leveraged capital structures increasingly unsustainable. The resilience of operators against these external pressures has varied according to their exposure to public vs. private payers and their position on the acuity care spectrum. Care companies at the higher end of the dependency spectrum, such as Voyage Bidco Limited with a larger share of disability care, have been comparatively resistant to funding cuts of local authorities, but are facing strategic pressures as the care model evolves towards assisted living schemes. Care homes more at risk have been those catering for residents with less complex needs such as Elli and Care UK. The business models of these three key players are also differentiated, with Care UK operating an asset-light structure, leasing most of its care facilit ies, whereas Voyage and Elli own the majority of their assets. This leads to a differentiation in Fitch's recovery approach, as it applies a liquidation scenario to Voyage and Elli, compared with Care UK's going -concern scenario. KEY ASSUMPTIONS Fitch's Key Assumptions within its Rating Case for the Issuer - Following Elli's placement in administration, Fitch is unable to provide a forward-looking credit assessment as it has limited visibility on the group's liquidity. In addition there is no sustainable capital structure and/or business plan available. Recovery Assumptions: - In its recovery analysis, Fitch assumes that a liquidation of Elli's assets would provide higher recoveries for lenders than a going-concern restructuring based on the current distressed performance. This is primarily due to Elli's freehold and long-leasehold properties, which Fitch believes continue to offer best use as care homes post restructuring. - Fitch applied a 35% discount to the latest available market value of Elli's property assets of GBP481million. RATING SENSITIVITIES Not applicable LIQUIDITY AND DEBT STRUCTURE Fitch has no visibility on the ongoing liquidity of the business following the initiation of administration proceedings at Elli. As it sees continued liquidity needs to run the underlying operations in the near future, Fitch expects that further funds might be required and, if needed, made available by existing lenders at arm's length to protect the value in the business. FOUR SEASONS: Administration Won't Affect Cumberland Care Homes --------------------------------------------------------------- Cumbernauld News reports that Four Seasons Health Care Group says a move into administration will not affect care arrangements or lead to the closure of homes in Cumbernauld, Scotland. Four Seasons Health Care operates 440 locations across the UK serving 17,000 residents and patients and employing 20,000 staff, Cumbernauld News discloses. This includes Carrickstone House Care Home offering nursing care, nursing dementia and palliative/end of life care and Cumbernauld Care Home in Greenfaulds offering nursing dementia, Cumbernauld News notes. Two of the holding companies behind the firm, Elli Investments Limited and Elli Finance (UK) Plc, which do not own or operate any care homes directly, appointed administrators on April 30 after struggling to repay their debts, Cumbernauld News cites. Four Seasons Health Care is launching an independent sales process, as the next stage of its restructuring, which it expects to complete by year end, Cumbernauld News relays. The operating companies under which the care home and hospital operations sit are not in administration and continue to be run as normal by the existing leadership teams, Cumbernauld News states. The Group, Cumbernauld News says, has entered into a funding agreement which provides sufficient operational funding to ensure continuity of care for all residents and patients during the independent sales period. NEPTUNE ENERGY: Moody's Alters Outlook on Ba3 CFR to Positive ------------------------------------------------------------- Moody's Investors Service affirmed the Ba3 Corporate Family Rating and Ba3-PD Probability of Default Rating of Neptune Energy Group Midco Limited, and the B2 rating assigned to Neptune Energy Bondco Plc's $550 million senior unsecured notes due 2025. Concurrently, Moody's revised the outlook to positive from stable. RATINGS RATIONALE The revision of the outlook to positive from stable reflects the robust operating results and low year-end leverage reported by Neptune in 2018, post acquisition of ENGIE SA (A2 RUR)'s oil and gas business (EPI) for $3.3 billion in February, as well as its improved reserves profile reflecting a 15% year-on-year increase in 2P reserves to 638 million barrels of oil equivalent (mmboe) at the end of 2018. In the second half of 2018, Neptune completed early additions to its portfolio, by acquiring VNG Norge AS for $437 million (including a contingent consideration of $24.3 million) and interests in the near-term Seagull development and undrilled Isabella prospect in the UK Central North Sea from Apache Corporation (Baa3 stable) for $70 million. These acquisitions combined with positive revisions at Cygnus and Gudrun, and extensions at Duva, Fram, Gjoa P1 and Snohvit, led to a net increase in the group's 2P reserves of 83 mmboe in 2018. This was equivalent to a reserves replacement ratio of 244% or 141% on an underlying organic basis. Neptune's 2P reserve life improved to 11.1 years (based on projected 2019 production) v. 9.3 years in 2017. In the period from 15 February to December 31, 2018, Neptune reported production of 161.8 thousand barrels of oil equivalent (kboepd). On a proforma basis, production increased by 3.1% compared to 2017. This reflected a full 12-month contribution from the Jangkrik field in Indonesia, as well as efficiency gains arising from the shift to a country-led model implemented post EPI acquisition. In addition, results benefited from higher realised oil and gas prices in the context of Neptune's prudent commodity price hedging policy. Overall, the group posted Moody's adjusted EBITDA of $1.78 billion on revenues of $2.54 billion. Despite paying a large dividend of $380 million to shareholders, equivalent to 63% of operating cash flow after capex, Neptune generated adjusted free cash flow of $220 million. This funded about half of the $411 million in cash spent on acquiring VNG and the Apache's UK assets. At year-end 2018, Neptune had Moody's adjusted total debt of $2.33 billion, translating into moderate leverage as measured by total debt to EBITDA of 1.3x. In 2019-2020, assuming a production of around 155-160 kboepd due to benefit from the start-up of the Touat gas project in Algeria scheduled for mid 2019 and three infill wells at Fram in Q4, Brent of $55/bbl, NBP of 40 pence/therm, TTF of EUR16/MWh and unit opex of $11.7/boe, Moody's estimates that Neptune would generate EBITDA of around $1.4 billion and operating cash flow of around $900 million taking into account current hedges. This should fund capex in full despite the 60% increase budgeted by management for 2019-2020 compared to 2018, as the group progresses several development projects (e.g. Njord, Fenja, Duva/Gjoa P1 and Seagull) and steps up exploration activity. In this context, Moody's notes that Neptune will likely need to significantly reduce its dividend pay-out in the next two years in order to remain FCF neutral and preserve the financial flexibility it enjoyed at year-end 2018. Moody's notes that despite the material additions booked to reserves in 2018, Neptune still exhibits relatively short 2P and 1P reserve lives relative to peers. This clearly underlines the need for the group to continue gaining access to additional hydrocarbon resources in order to sustain its production profile in the medium to long term. In this context, Moody's expects that Neptune will show restraint, in line with the prudent financial policy embedded in the company's shareholder agreement, which states the aim to maintain a maximum net leverage of 1.5x. Neptune demonstrates a good liquidity profile. At year-end 2018, it had unrestricted cash balances of $191 million and availabilities of around $1 billion under its RBL facility with a borrowing base amount of $1.99 billion following the March 2019 redetermination. In addition, Moody's expects the group to be broadly FCF neutral in 2019-2020. The B2 rating assigned to the $550 million senior unsecured notes issued by Neptune Energy Bondco Plc and guaranteed by some of the operating subsidiaries reflects the fact that the notes are senior subordinated obligations of the respective guarantors and subordinated to all existing and future senior obligations of those guarantors, including their obligations under the RBL facility. In addition, the notes are structurally subordinated to all existing and future obligations and other liabilities (including trade payables) of Neptune's subsidiaries that are not guarantors. The two notch difference between the B2 rating on the notes and the CFR of Ba3 reflects the large amount of RBL ranking ahead of the notes. WHAT COULD CHANGE THE RATING - UP The ratings could be upgraded if the company demonstrates the ability to sustain a production profile within a range of 150-160 kboepd and maintain a 2P reserve life close to the 2018 year-end level of 11 years, while keeping adjusted total debt to EBITDA below 2.5x and retained cash flow (RCF) to total debt above 30%. WHAT COULD CHANGE THE RATING - DOWN The ratings could be downgraded should the production profile and/or reserve life of the company significantly deteriorate. The rating would also come under pressure should the group generate sustained negative FCF leading to adjusted total debt to EBITDA rising above 3.5x and/or RCF to total debt falling below 20%. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017. CORPORATE PROFILE Headquartered in London (UK), Neptune Energy Group Midco Ltd (Neptune) is the holding company of a medium-sized independent exploration and production oil and gas group, with hydrocarbon resources located mainly in the Norwegian, UK and Dutch sectors of the North Sea (70% of total 2P reserves of 638 mmboe) as well as in Germany, North Africa (Egypt and Algeria) and the Asia Pacific region (Indonesia, Australia). In the period February 15 to December 31, 2018, Neptune reported average production of 161.8 kboepd split between natural gas (including LNG) for 72% and liquids for 28%. It generated revenues of $2.5 billion and EBITDAX of $1.9 billion. Neptune is owned by three main shareholders China Investment Corporation (49%), Carlyle Group (30%) and CVC Capital Partners (20%) and management owns the remaining 1%. ********* S U B S C R I P T I O N I N F O R M A T I O N Troubled Company Reporter-Europe is a daily newsletter co- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman, Editors. Copyright 2019. All rights reserved. ISSN 1529-2754. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. 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