/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/190530.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, May 30, 2019, Vol. 20, No. 108 Headlines B O S N I A A N D H E R Z E G O V I N A SECERANA: Creditors Reject Turkish Investor's Offer for Assets C R O A T I A ULJANIK: Court Establishes Creditors Board, June 3 Meeting Set F R A N C E INSIGNIS SAS: S&P Withdraws 'B' ICR Following Refinancing RALLYE SA: Bankruptcy Credit Event Triggers CDS Payout G E R M A N Y AI PLEX: S&P Assigns Prelim. B Issuer Credit Rating, Outlook Stable NOVEM GROUP: Fitch Assigns 'B+(EXP)' Long Term Issuer Rating THYSSENKRUPP AG: Fitch Keeps BB+ IDR on Watch Negative I T A L Y DECO 2019: Fitch Withdraws B+(EXP) Rating on Class E Debt L U X E M B O U R G GARFUNKELUX HOLDCO: S&P Alters Outlook to Neg on Deleveraging Risk MATADOR BIDCO: S&P Assigns (P)BB- ICR on Planned Acquisition R U S S I A RTS BANK: Declared Bankrupt by Samara Arbitration Court T2 RTK: Fitch Raises LongTerm IDR to 'BB', Outlook Positive S W E D E N SBAB BANK: S&P Lowers Rating on AT1 Hybrids to BB, Off Watch Neg. U N I T E D K I N G D O M BRITISH STEEL: More Than 80 Potential Bidders Emerge FLYBE GROUP: Chief Executive Officer to Step Down in July VIRGIN MEDIA: Fitch Affirms 'BB-' LT Issuer Default Rating - - - - - =========================================== B O S N I A A N D H E R Z E G O V I N A =========================================== SECERANA: Creditors Reject Turkish Investor's Offer for Assets -------------------------------------------------------------- SeeNews reports that the creditors of Bosnian sugar mill Secerana have turned down an offer from a Turkish investor for the purchase of the company's assets because of its low price. According to SeeNews, apart from failing to offer the previously agreed price, the investor also did not provide an adequate bank guarantee, news agency SRNA quoted the head of Secerana's board of creditors, Vojislav Nikolic, as saying. Mr. Nikolic told a news conference on May 27 after the board of creditors' meeting, that the commercial court in Bijeljina, in northeastern Bosnia, had received a letter of interest from a company called Niva and based in Zabalj, Serbia, which produces medical equipment, SeeNews relates. "They are interested in examining the situation at the factory and submitting an offer after that," SeeNews quotes Mr. Nikolic as saying. The board of creditors will convene again on July 4, SeeNews discloses. Mr. Nikolic, as cited by SeeNews, said it plans to continue with the sale of Secerana's assets at a price of BAM10 million (US$5.7 million/EUR5.1 million). According to earlier media reports, the Turkish investor has proposed to pay EUR4.25 million for Secerana's assets and promised to increase its offer in order to meet the ask price prior to the latest meeting of Secerana's creditors, SeeNews states. Secerana went bankrupt around four years ago over an outstanding debt of BAM16.5 million, SeeNews recounts. The estimated value of its assets stands at some BAM23 million, SeeNews relays, citing local media reports. ============= C R O A T I A ============= ULJANIK: Court Establishes Creditors Board, June 3 Meeting Set -------------------------------------------------------------- SeeNews reports that a Croatian commercial court said it has decided to establish a board of creditors at Uljanik shipyard and called its first meeting for June 3. The company's creditors include HBOR, Istarska Kreditna Banka Umag, Zagrebacka Banka, HEP Elektra, HEP-ESCO, Cosicpromex, and big suppliers, SeeNews discloses. According to SeeNews, the court in Pazin said in a statement on May 28 the board will comprise members of the Croatian government, the Croatian Bank for Reconstruction and Development (HBOR), state-owned electricity supplier HEP Elektra, as well as two private individuals -- Valdi Matkovic (one of Uljanik's smaller creditors) and Samir Hadzic (a former employee). Earlier this month, the Pazin court launched bankruptcy proceedings against Uljanik Shipyard and later on against its umbrella company, Uljanik Group, in a response to a request submitted in March by Croatia's financial agency FINA over overdue debts, SeeNews relates. Uljanik Group also comprises the 3 Maj shipyard, along with smaller subsidiaries, SeeNews states. The group has been in financial trouble for some time due to the adverse effects of the global financial crisis, which resulted in its shipyards failing to meet contract obligations and losing vital shipbuilding deals, SeeNews notes. =========== F R A N C E =========== INSIGNIS SAS: S&P Withdraws 'B' ICR Following Refinancing --------------------------------------------------------- S&P Global Ratings withdrew its 'B' ratings on Insignis SAS (Inseec U) and its debt at the issuer's request. Inseec U was sold to new shareholder, Cinven, and completed a refinancing in April 2019. As a result of the refinancing, Inseec U has repaid in full its senior secured facilities, including the EUR275 million senior secured term loan due in 2025 and the EUR25 million revolving credit facility due 2024, and has raised new private debt. S&P withdrew the ratings at Inseec U's request. RALLYE SA: Bankruptcy Credit Event Triggers CDS Payout ------------------------------------------------------ Katie Linsell at Bloomberg News reports that credit-default swaps insuring Rallye SA's debt will pay out, handing a profit to short sellers who've bet for years on the company's demise. Swaps on Rallye, the parent of French supermarket retailer Casino Guichard-Perrachon SA, were triggered in a bankruptcy credit event, a panel of traders ruled on May 28, Bloomberg discloses. According to Bloomberg, the Credit Derivatives Determinations Committee said it will reconvene to discuss settlement. The decision paves the way for a payout on contracts covering a net US$664 million of Rallye's debt, Bloomberg relays, citing the latest data from the International Swaps & Derivatives Association. Rallye's swaps were quoted at 11,195 basis points at 5:00 p.m. on May 28 in London, signaling about 90% probability of default within five years, according to ICE Data Services, Bloomberg notes. Rallye and other Casino holding vehicles were placed under creditor protection late last week to save the debt-burdened retail group from collapse, Bloomberg recounts. Jean-Charles Naouri, Casino's chief executive officer and chairman who controls the company through a complex ownership structure, may lose his status as part of the safeguard proceedings, Bloomberg states. France-based Rallye, together with its subsidiaries, engages in the food, non-food e-commerce, and sporting goods retailing activities in France and internationally. ============= G E R M A N Y ============= AI PLEX: S&P Assigns Prelim. B Issuer Credit Rating, Outlook Stable ------------------------------------------------------------------- S&P Global Ratings assigned its preliminary 'B' issuer credit rating to AI PLEX Holdco II GmbH (AI PLEX) and its preliminary 'B' issue ratings to the proposed senior secured debt, co-issued by AI PLEX Acquico GmbH. S&P said, "Our ratings are preliminary and will be converted to final upon receiving the final documentation of the instruments rated, provided all terms and conditions are aligned with our initial assumptions, including for terms and conditions of the non-common equity instruments factored in the structure." The rating on AI PLEX Holdo II primarily reflects high leverage at closing of the acquisition, with about 6.0x-6.5x adjusted gross debt to EBITDA. S&P said, "This is consistent with our view of the company's private equity ownership after the takeover, translating into highly leveraged funding structures and financial policies, both at closing and going forward. The rating also reflects our view of the business as commodity-like with a narrow focus of product offerings, and its relatively small scale in comparison with other chemicals players. We estimate that about 75% of current profits relate directly to upstream commodities (bulk monomers and MMA), which are highly sensitive to supply and demand patterns. Although the company benefits from a strong cost position in this segment, we forecast that recent supply constraints will ease in the coming years, resulting in moderating MMA prices and margins. We believe the business' vertical integration into hydrogen cyanide (HCN), sound market shares in MMA and derivatives, and further expansion into more specialty-type downstream products should help mitigate the expected market softening, sustaining strong free cash flow and leverage of 6.0x-6.5x, which we see as commensurate with the rating." Key drivers of AI PLEX's competitive position include its market position as a major global player in MMA markets: It is the second largest globally (12% market share) after Mitsubishi, and No. 1 in Europe. S&P said, "We view benefits in terms of economies of scale (with capacity of above 1 million tons), solidity of its market shares, and diversity of the business. AI PLEX benefits from a modest diversification from a geographical perspective, slightly concentrated toward Europe with 52% of sales, followed by the Americas (28%), and Asia-Pacific (20%). We view the business' end market exposure as slightly skewed toward cyclical end markets, as a large portion of product sales are destined to the construction industry (33%) and auto industry (17%), although the remaining portfolio is fairly well diversified, including some more stable or resilient end markets such as pharma and healthcare." Business diversity is helped by downstream product lines being included in the carve-out, bringing different market exposures and more specialized product features in sales and profitability. S&P said, "We view the production process for MMA as rather commodity-type, subject to cyclical demand patterns, and of which pricing is highly sensitive to supply/demand patterns and therefore highly volatile. However, AI PLEX's cost position in MMA production is a relative strength in the business, in our view, in that it is largely vertically integrated into HCN, and operating the various divisions in a Verbund concept, using energy and procurement under a synergistic model. AI PLEX operates four core base monomer plants in Germany, the U.S., and Asia, using C3 + Acetone and C4 + Isobutene technologies. "The group's cost position is strong for the sector according to our estimate, translating into average EBITDA margins for a global commodity chemicals producer. We view cost position and operating efficiency in general as key aspects of the competitive position of commodity chemicals players, therefore we see risks coming from competing technology in the production of MMA, such as the alpha production process that appears highly cost competitive. While AI PLEX's current position is fairly protective in the current demand/price environment, we do not rule out the perspective of further commoditization of MMA and derivatives, on the back of decreasing global production costs and intensifying competition. AI PLEX's proprietary LiMa technology in the MMA production based on ethylene, if implemented, may alleviate some of the competitive risks over the longer term, in our view. "We also consider the recent very high MMA prices as unsustainable, given that they have been linked to material supply constraints. This has been resulting in margins materially above the run-rate level for the sector, in our view, and we believe the market is likely to cool down over the coming quarters as a result of capacity additions and a return to a mid-cycle supply/demand balance. Although difficult to estimate, we anticipate nonetheless that demand from key end markets will help absorb upcoming capacity additions, supporting continued MMA demand and resulting in AI PLEX's margins being sustained around 17%-18% and free cash flow remaining largely positive." Margin pressure is also mitigated by the company's strategy to expand downstream products, namely in molding compounds, methacrylate resins, and acrylic products. S&P therefore expects a portion of monomers and MMA production to be progressively reallocated to specialty products in the coming years. This is despite most of the profits being generated in the upstream segments. But it should enable the business to mitigate direct exposure to MMA prices, acquire additional specialty margins, and diversify its end market base, at the expense of upcoming, overall moderate, capital expenditure (capex) on capacity expansion. S&P said, "We view credit metrics as clearly highly leveraged over our rating horizon to 2020, with the EUR1,485 million term loan B at closing translating into adjusted gross debt to EBITDA of about 6.0x-6.5x on average, and adjusted funds from operations (FFO) to debt in the 9%-10% area. This reflects Advent International's highly leveraged funding structure, and our expectation of a potential aggressive financial policy going forward, although our base case does not factor in any dividends. For that reason, we do not net cash balances from our adjusted debt calculation. "We estimate nevertheless as relative strengths the business' ability to sustain supportive metrics under the proposed capital structure, reflected in its strong recurring free cash flow, even in a moderating business environment, and ample headroom with EBITDA interest coverage ratios well above 3.0x. "Our debt adjustments comprise about EUR430 million in pension liabilities, EUR40 million in future operating lease obligations, and factoring utilization that management expects at about EUR125 million from 2020. Our EBITDA adjustments relate mainly to operating lease rent for which we add back EUR8 million. We deduct restructuring costs although consider the carve-out separation costs as one-offs. "The stable outlook reflects our expectation that the company will sustain adjusted debt to EBITDA of 6.0x-6.5x, supported by growth in the downstream EBITDA base and materially positive free cash flows. We also view adjusted EBITDA interest coverage of approximately 3.5x in our forecast as comfortable for the rating. We expect moderate leeway for a weakening of credit ratios at the current rating level, given our expectation of normalizing MMA market conditions. We also expect adequate liquidity and comfortable headroom under the covenants for the rating. "Rating downside may arise should we see adjusted debt to EBITDA deteriorate to above 6.5x without short-term recovery prospects, and EBITDA cash interest decrease below 3.0x. This could stem from a significantly higher-than-expected decline in MMA prices due to a large increase in market capacity such that market demand could not absorb it. A material cut in free cash flow and as a result on liquidity sources could also constrain the rating. "Rating upside is constrained by group's private equity ownership and by the highly leveraged metrics we anticipate. However, much stronger demand for MMA and its derivatives, with sustainable prices, such that weighted average adjusted debt to EBITDA improved toward 5.0x, could result in a positive rating action. An upgrade would also require a clear financial policy commitment from the financial sponsor." NOVEM GROUP: Fitch Assigns 'B+(EXP)' Long Term Issuer Rating ------------------------------------------------------------ Fitch Ratings has assigned German automotive supplier Novem Group GmbH a first-time expected Long-Term Issuer Default Rating (IDR) of 'B+(EXP)' with a Stable Outlook. Fitch has also assigned an expected instrument rating of 'BB-(EXP)'/'RR3'/71% to the group's proposed EUR375 million senior secured floating rate notes. The ratings reflect the company's leading market position in interior design trim elements, strong profitability and free cash flow (FCF) margins, coupled with sound organic growth prospects. The ratings also factor in high financial leverage (funds from operations (FFO) adjusted gross leverage), which Fitch expects to be at 3.9x pro forma for the transaction, as well as some concentration in terms of customers and products offered. The Stable Outlook reflects Fitch's expectations that Novem will continue to generate healthy FCF, while FFO gross leverage will remain broadly stable over the coming 12-18 months. KEY RATING DRIVERS High Opening Leverage: Pro forma for the refinancing, Fitch forecasts Novem's FFO adjusted gross leverage to exceed 3.9x at end-2020 (YE March), which is above Fitch's expectations for the rating and constrains its financial profile to the 'B' rating category. Fitch forecasts very limited de-leveraging from 2021 through 2022, due to non-amortizing debt and stable underlying FFO. However, Fitch expects FFO adjusted gross leverage to decline towards 3.5x beyond 2022-2023, a level more commensurate with the rating. Strong cash generation ability provides Novem with significant de-leveraging potential, should it decide to allocate cash flows towards gross debt repayments. Leading Niche Market Position: Fitch views Novem's market position as strong and sustainable, based on its position as the largest global supplier within the niche decorative interior trim elements. Despite the company's comparatively small scale (revenue of around EUR700 million) compared to the Fitch-rated universe of automotive suppliers, Novem enjoys a market share of around 40% within global decorative interior trims and is twice as big as the closest competitor NBHX (unrated). Strong FCF Generation: Novem's operations are highly cashed generative. Fitch projects strong positive FCF, steadily increasing to about EUR60 million in 2021 through 2023. Fitch expects the FCF margin to be mid-single digit over the rating horizon, which Fitch deems solid for the rating and partly offsetting the high leverage. Strong cash generation is driven by the expectation of stable and profitable operations aided by moderate trade working capital requirements, limited shareholder distributions and normalized CapEx of around 4% of sales, following the completion of major investment projects in recent years. Less Volatile Premium Market: Novem focuses on the premium automotive market, which is smaller than the mass market segment, but has been more resilient to market downturns and has also shown a higher growth rate. Fitch expects this trend to continue albeit at a lower rate, and drivers include sector trends such as electrification and customization as well as generally strong demand for and availability of premium cars in emerging markets. However, on-going sector trends are putting pressure on OEMs and have resulted in announcements of cost-cutting programmes. This could have an impact on auto suppliers, including Novem. Corporate Governance, Shareholder Distributions: Fitch understands that Novem's owner, Bregal, and management are committed to de-lever, whilst limiting shareholder remuneration. The rating reflects Fitch's expectations for sustainably strong levels of residual cash available for business needs and de-leveraging. Increased shareholder remuneration leading FCF to decline below 2% could be negative for the ratings. High Customer Concentration: Novem's customer concentration is high, with its top two customers accounting for about 65% of group revenue, resulting in pronounced reliance on the continuous commercial success of these customers. Also, the focus on the premium automotive market creates a naturally smaller client universe for Novem. However, the dispersion of customer exposure across multiple car platforms partly mitigates this. M&A Risk: Although Novem's historical growth has been achieved organically, Fitch understands that the company's acquisition approach is more of opportunistic nature. Management expects continued organic growth, but Fitch believes that acquisitions could be an alternative way to secure future growth. Fitch's rating case includes healthy FCF, which could allow for bolt-on acquisitions of up to an aggregate amount of around EUR200 million by 2023 if funded with internal cash flow. Larger debt-financed acquisitions would be treated as event risk. DERIVATION SUMMARY Novem is smaller than the majority of Fitch's portfolio of auto suppliers, including Faurecia SA (BB+/Stable), Stabilus SA and Superior Industries Inc. (b*/Stable/US credit opinion), but more profitable with typical industry EBITDA margins in a range of 8%-12%, compared with Novem's stronger profitability in the high teens. Novem's business profile shows weak 'BB' category attributes, with an emphasis on the company's defendable niche leadership position in interior trim elements, medium value-add products, and good geographical diversification. Its focus on the premium car market and resulting higher customer concentration combined with a narrower product offering compares unfavorably with more diversified suppliers including Faurecia. Similar to most peers, Novem's exclusive automotive exposure is cyclical and moderately weaker compared to German peer Stabilus, which shows one of the least cyclical end-market exposures, supported by about 40% of revenues stemming from a wide array of non-automotive customers. Novem's financial profile is in line with a 'B' category rating. The company's FFO adjusted gross leverage of 3.9x at end-2020, pro forma for the refinancing, compares well to Superior Industries (above 5.0x). However, Novem is more levered than Stabilus (below 3.0x). Although Novem's leverage metrics are moderately weak for the rating, its financial profile is adequately supported by the company's strong FCF generation, resulting from industry-leading profitability margins and comparatively lower capex requirements. KEY ASSUMPTIONS - Revenue growth at a CAGR of 4.0% 2019-2023 with a higher rate in 2022/23 reflecting the phasing of tooling sales and related series revenues - EBITDA margin to erode mildly by around 100bp over the four-year forecast period - Capex of about 3.5%-4.0% of revenues, which is meaningfully lower than previous years as several significant capital projects have been completed - Moderately negative working capital requirements of EUR16 million in 2020 dropping to around EUR10 million annually thereafter - No dividend payments or acquisitions are included in the forecast - Effective tax rate of 25% RECOVERY ANALYSIS Fitch's recovery analysis reflects a going concern approach as the company's solid market position in its niche is reflected by the company's strong margins. This implies a substantially higher value in maintaining Novem as a business post distress, than in an asset disposal scenario. A 35% discount to FY2019 EBITDA of EUR137 million (around the point of transaction closing) has been applied, representing the point of theoretical distress. Fitch used a 4.5x multiple, reflecting Novem´s leading niche position and strong FCF. After deduction of 10% for administrative claims, the senior secured loan holders would be able to recover approximately 71% of the debt face value, leading to the senior secured instrument rating of 'BB-(EXP)'/'RR3'/71%. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO gross leverage below 3.0x sustainably, - FFO Fixed Charge Coverage sustainably above 4.0x, - Increased scale with revenues approaching EUR1 billion and reduced customer concentration. Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO gross leverage above 4.0x sustainably, - FFO Fixed Charge Coverage sustainably below 3.0x, - FCF margin sustained below 2%. THYSSENKRUPP AG: Fitch Keeps BB+ IDR on Watch Negative ------------------------------------------------------ Fitch Ratings has maintained thyssenkrupp AG's (TK) Long-Term Issuer Default Rating (IDR) of 'BB+' and senior unsecured notes (BB+) on Rating Watch Negative (RWN). Fitch has simultaneously affirmed TK's Short-Term IDR and commercial paper rating at 'B' and removed them from Rating Watch Negative. The rating actions follow the company's announcement that it has abandoned its plans to separate the group into two standalone, publicly traded companies and to transfer its European steel operations into a joint venture with Tata Steel Limited (TSL), amid the European Commission's expected decision to block this transaction. It also follows TK's guidance revision for 2019 with many divisions underperforming, impacted by market headwinds, cost inflation, and a legal settlement. At the same time, the company announced the pursuit of other strategic portfolio realignments, most notably the potential initial public offering (IPO) of its Elevator Technology unit (ET). The RWN reflects uncertainty around TK's financial profile and free cash flow (FCF) generation over the coming 12-18 months, which is contingent on the cash proceeds from the envisaged ET IPO and their re-deployment, the level of future minority dividends within ET, representing a cash drain on the group's FFO generation, but also the scope of planned restructuring costs, which affects the short-term FCF generation. The affirmation and removal from RWN of the Short-Term IDR and the commercial paper rating reflect Fitch's expectation that these ratings will remain at 'B' upon resolution of the RWN on the Long-Term ratings. Fitch will resolve the RWN after the closing of the ET IPO, which could occur in more than six months from now. Currently, the closing of this transaction is expected for the financial year 2019/20. KEY RATING DRIVERS Partial IPO of ET: Fitch views TK's plan to float its ET business on the stock market as credit positive. Fitch understands that management's priority for the IPO proceeds is to repay the debt to strengthen the company's weak balance sheet, but also to fund cash restructuring costs. ET is the largest contributor of EBIT to the group and Fitch expects continued solid growth on the back of the industrialization of emerging markets. However, Fitch notes that valuation, related transaction costs for the IPO and the re-deployment of proceeds remains uncertain beyond the company's commitment. Fitch understands that TK plans to initially float a minority stake. Fitch believes the sale of a further stake or entire sale of ET cannot be excluded, but Fitch would capture this as event risk beyond the initial IPO. The company guides that it wants to be ready in 2019/20 to pursue the ET IPO, subject to market conditions. Uncertain FFO Generation: Fitch believes the ET IPO would free up a significant amount of capital that could be used to de-lever TK's capital structure. De-leveraging will be offset by future dividends paid to minority shareholders of ET, which could represent a sizeable cash leakage. Fitch believes that a sustained dividend by ET will be indispensable to attract equity investors, reflecting its maturity level, a stable cash generation but also dividend payout ratios of competitors in the elevator market ranging between 35%-65% of net income. More visibility on the IPO proceeds along with the ET dividend policy will be a key factor in resolving the RWN. Steel JV Collapse Negative: The European Commission's expected decision to block the steel joint venture with TSL in the absence of further concessions weakens TK's business profile. Fitch believes that the reintegration of Steel Europe (SE) reconstitutes the company's direct exposure to the cyclical European steel industry, which is suffering from overcapacity. SE will be unable to use the combined assets' synergies to strengthen its cost structure. As a mitigating factor, TK's group cash flows will once again reflect SE's cash flows, which should support its FFO leverage metrics, especially amid steel earnings remaining above mid-cycle for the near to medium term. Holding Structure Positive: Fitch views TK not proceeding with its plan to separate the group into two standalone, publicly traded companies as credit positive. TK's current corporate structure benefits from higher diversification and is less reliant on cyclical businesses. The ratings would have become the ratings of TKM, which would have comprised the more seasonal materials services, forged technologies and bearings, marine systems and the 50% stake in the steel JV with TSL. Execution Risk Over Restructuring: The group's management announced a further restructuring programme and aims to cut around 4% of the global workforce, equating to around 6,000 jobs, and to adopt leaner corporate headquarters. Fitch believes these measures could support a sustained improvement in EBIT and operational cash flow generation, but this will be only achieved through sizeable cash costs to cover the restructuring programme. Fitch notes the uncertainty around the magnitude of restructuring costs and related execution risks. Capital Goods Businesses Underperforming: Challenged operational performance with lower margins and thin cash flow generation across the groups' capital goods units could exert rating pressure if sustained. Despite a healthy order intake for most of the units, the company faces continuing challenges primarily stemming from unfavorable macroeconomic factors. Softer demand for automotive components in China and Europe, tariffs in the US, loss-making legacy projects in the Industrial Solutions and Marine Systems units as well as continuing import pressures in its Material Services operations weigh on the group's EBIT and cash flow generation. TK's mature Elevators business continues to provide generally stable cash flows and margins. Weak FCF Generation: TK's FCF generation has been subdued over the past years, as evidenced by consistently negative FCF margins. Fitch expects FCF margins to remain negative at around -2% at end-19 (YE September), compared with -1% at end-18. Fitch expects the announced restructuring programme to additionally weigh on FCF generation over the coming three years. Fitch believes that a positive trajectory of sustaining neutral to slightly positive FCF generation is contingent on the actual magnitude of restructuring costs, the achievement of targeted cost reductions at the group's corporate level, but also a substantial improvement in the group's capital goods operations. Further Strategic Alternatives: Apart from the ET IPO consideration, Fitch understands that TK is reviewing its investments across the remaining business units. SE and Material Services (MX) could seek consolidation options on a smaller scale, while TK may pursue different ownership structure for its Components Technology (CT) Industrial Solutions (IS) or Marine Systems (MS) units. Fitch understands that strategic alternatives could entail partnerships or the sale of stakes. Partial divestiture of the segments, divestiture with subsequent debt reduction, or strategic restructuring efforts could have a positive impact on the company's leverage and overall credit profile. However, Fitch notes that these alternatives are only in very early stages. Fitch would assess the impact of any transaction as it occurred. European Steel Prices Under Pressure: Weakening European steel demand amid slower European industrial growth, trade tensions, US Section 232 tariffs, higher energy and raw materials costs and rising EU imports despite EU trade protection measures continue to weigh on European steel prices. However, Fitch believes that the effect of weaker steel prices will be more limited on TK compared with peers such as ArcelorMittal due to TK's diversification into the capital goods businesses. Undersupplied Iron Ore Market: Iron ore's tight supply side has led to a multi-year high price. This is primarily the result of the suspension of Vale's Brucutu mine as well as severe weather conditions in Brazil and Western Australia. The world's biggest producers of this key steelmaking ingredient reduced their guidance for 2019. The US imposed sanctions on Iranian iron ore could further tighten the market. Fitch expects that raw material cost pressures will persist throughout the year, squeezing TK steel business's margins and negatively affecting its profitability. DERIVATION SUMMARY TK's rating reflects its strong business profile with a more diversified business profile than steel-focused peers, in particular closest peer ArcelorMittal S.A. (BBB-/Stable), stemming from its capital goods businesses, which provide more earnings stability. This compares with ArcelorMittal's greater scale, more geographic diversification, vertical integration into raw materials (iron ore) and stronger credit metrics, notably a more resilient FCF margin and lower FFO adjusted gross leverage. Conversely, TK has greater exposure to volatile steel earnings, a greater fixed cost base and lower production flexibility than capital goods peers, including KION GROUP AG (BBB-/Stable) and Atlas Copco AB (A+/Stable). These peers also have a greater proportion of total group sales derived from stable servicing and maintenance. KEY ASSUMPTIONS - Consolidated revenue growth returning to low single-digits in 2020 through 2022. - Re-consolidation of SE into 2018/19 results (previously reported as discontinued operations). - Preparation of an initial ET IPO within 2019/20, floating an initial minority stake. - ET to remain fully consolidated post initial IPO. - Cash settlement of cartel litigation assumed in 2019 as non-recurring cash flow. - Capex returning to EUR1.6 billion in 2019 (including SE) and remaining at that level through 2022. RATING SENSITIVITIES Fitch expects to resolve the RWN upon the completion of the ET IPO, when most outstanding credit relevant factors should have emerged. These include the amount of listing proceeds and envisaged re-deployment, as well as guidance of the future dividend policy of TK ET, which is reflected in Fitch's FFO based metrics. At the same time, Fitch also expects firmer guidance on planned restructuring efforts. The composition of these factors will determine the level of the group's FFO adjusted leverage and cash flow profile. If the ET IPO is not completed, TK's rating may be affirmed at 'BB+' or downgraded in light of the remaining credit-relevant drivers. ========= I T A L Y ========= DECO 2019: Fitch Withdraws B+(EXP) Rating on Class E Debt --------------------------------------------------------- Fitch Ratings issued an update on the report on DECO 2019 - VIVALDI S.r.L. published on May 16, 2019, following the reduction in the loan balance and adjustment to the note balances. Fitch is withdrawing DECO 2019 - Vivaldi S.r.L. class E expected rating as this note is not being issued. Fitch has taken the following rating actions on DECO 2019 - VIVALDI S.r.L.: EUR122.0 million class A: affirmed at 'A+(EXP)sf'; Outlook Stable EUR39.6 million class B: affirmed at 'A-(EXP)sf'; Outlook Stable EUR41.4 million class C: affirmed at'BBB-(EXP)sf'; Outlook Stable EUR19.23 million class D: upgraded to 'BB(EXP)sf' from 'BB-(EXP)sf'; Outlook Stable EUR5.82 million class E: 'B+(EXP)sf'; withdrawn The transaction is a 95% securitization of two commercial mortgage loans totaling EUR233.935 million to two Italian borrowers both sponsored by Blackstone funds. The loans are both variable-rate (with variable margins) and each secured on an Italian retail outlet. A merger of the propco and holdco is expected for the Franciacorta borrower. The final ratings are contingent upon the receipt of final documents conforming to the information already received. RATING ACTIONS DB- Italian Retail Outlets-Project Spark A LT A+(EXP)sf Affirmed A+(EXP)sf B LT A-(EXP)sf Affirmed A-(EXP)sf C LT BBB-(EXP)sf Affirmed BBB-(EXP)sf D LT BB(EXP)sf Upgrade BB-(EXP)sf E LT WDsf Withdrawn B+(EXP)sf VIEW ADDITIONAL RATING DETAILS The ratings were withdrawn with the following reason: Bonds Cancelled KEY RATING DRIVERS Weakening Macro-economic Environment Italian GDP growth has stalled as domestic policy uncertainty and weaker external demand have dragged down investment, while private consumption growth has also lost momentum. The risk of this filtering into asset performance is reflected in Fitch's base market value declines (MVDs) both being greater than 20%, with no ratings above the 'Asf' category. Sound Collateral Stabilizes Income The portfolio is generally of good quality, attracting solid occupational demand. The catchment areas support stable sales from customers who view these outlets as attractive leisure destinations. This mitigates the characteristically short weighted average (WA) lease to break of 2.4 years and the predominantly unrated tenant base. Franciacorta Weighs on Ratings With an exit debt yield of 7.6%, the Franciacorta loan's high leverage is a constraint on the ratings, given the pro rata structure. This is despite good performance in the fashion outlet, which has recorded strong rental growth over recent years, due in part to investment in expanding the centre. Both centers having large catchment areas limits scope for adverse selection, although prepayment of Palmanova constrains the classes A to C note ratings. Pre-merger Risk Some EUR35 million of Franciacorta's debt is to the parent holdco. The mortgaged propco cannot pay dividends before the holdco and propco are merged. This means excess rent will be trapped, building credit enhancement as long as the parent pays interest by drawing on a letter of credit. Once the mortgage is discharged and all propco debt is settled, the parent can receive liquidation proceeds net of any unsecured creditors of the propco. No unsecured creditors affect Fitch's rating analysis. =================== L U X E M B O U R G =================== GARFUNKELUX HOLDCO: S&P Alters Outlook to Neg on Deleveraging Risk ------------------------------------------------------------------ S&P Global Ratings said that it revised its outlook on Luxembourg-based debt collection company Garfunkelux Holdco 2 S.A. (Lowell) to negative from stable. S&P affirmed its 'B+/B' long- and short-term issuer credit ratings on the company. S&P also affirmed: -- The 'B+' issue rating on the existing senior secured notes issued by Garfunkelux Holdco 3 S.A.; the recovery rating is unchanged at '4'. -- The 'BB' issue rating on the super senior revolving credit facility (RCF) co-issued by Lowell Holding GmbH and Simon Bidco Ltd.; the recovery rating is unchanged at '1'; and -- The 'B-' issue rating the senior unsecured notes issued by Garfunkelux Holdco 2 S.A. The recovery rating is unchanged at '6'. S&P said, "The outlook revision reflects our view that leverage will remain high, at 5.25x-5.50x for 2019 (S&P Global Ratings adjusted), placing pressure on the group to accelerate deleveraging from 2020 onward. Even though our base-case expectation is still that leverage will drop sustainably below 5x gross debt to EBITDA in late 2020, there are substantial short-term risks to this scenario. As such, we see an increased risk that the group will miss our forward-looking leverage targets, hence our outlook revision. "Our base case is for leverage to fall sustainably lower, to 4.25x-4.75x, but not until late 2020. After some acquisitive balance sheet expansion, we expect Lowell's more-focused strategy and economies of scale will begin to deliver higher, stable EBITDA and support a more sustainable financial position at that time. "For 2019, however, we forecast slow deleveraging alongside material balance sheet expansion. We expect 2019 portfolio purchases to grow modestly from 2018 levels, funded by drawings on the revolving credit facility (RCF). The effect of the portfolio acquisitions and RCF drawing will be to slow the pace of deleveraging for 2019 from our previous forecast. Year-end 2019 leverage will now likely be around 5.3x, compared to our previous expectation of less than 5.0x. This places greater importance on deleveraging in 2020, and leaves little flexibility for unexpected or negative one-offs." S&P's base case for 2019 credit metrics includes: -- Debt to adjusted EBITDA of 5.25x-5.50x; -- Funds from operations (FFO) to debt of 11%-13%; and -- EBITDA cash interest coverage of 2.9x-3.1x. Underpinning this base case is S&P's expectation that 2019 will see further growth in cash flows. However, Lowell's ability to self-fund portfolio purchases from internal cash flows will remain burdened by its relatively high cost of debt and continued portfolio expansion. As such, our forecasted credit ratios assume: -- Continued cash income growth from the expansion of the third-party collections business across the group's Nordic and Northern European portfolios, and the first full-year effect on group results from the Nordic carve-out business; -- Supportive growth in EBITDA margins as the group manages its currently outsized overheads, with EBITDA margins improving by the low single digits in 2019; and -- No bond issuance in 2019, although S&P expects the group to draw about EUR180 million-EUR200 million from its RCF. S&P said, "Our rating factors in the group's increasingly strong strategic position within the debt collection industry in Europe. Following last year's acquisition of the carve-out the group is now well diversified across nine core geographies, focusing on consumer debt in these mature, well-regulated markets. Although we do not see upside to our assessment of the group's competitive position and scale in the medium term, these factors will likely prove a key rating support providing reliable, well-priced cash flows beyond 2019-2020. "We apply a one-notch negative adjustment to our 'bb-' anchor to arrive at our 'B+' rating. This adjustment reflects Lowell's track-record of weaker credit metrics relative to peers following its rapid portfolio growth and aggressive M&A activity. The rating also reflects that the group's financial sponsor ownership remains relatively immature and somewhat more aggressive than the anchor implies. "The negative outlook reflects our view that Lowell could struggle to reduce its debt-to EBITDA sustainably below 5x over the next 12-24 months. We also note Lowell's intention to continue its portfolio expansion materially beyond the portfolio's replacement rate over the same period, and we expect modest liquidity pressure over 2019 and 2020 to add stress to the group's financial position. "We could lower our rating over the next 12 months if we see evidence that the group does not have the capacity, or willingness, to deleverage in line with our base case expectations. Specifically, if Lowell looks likely to overshoot our gross debt to EBITDA target range of 5.25x-5.50x in 2019, we would likely take a negative rating action. We could also consider a negative rating action if Lowell changes its public commitment to deleveraging, or delays deleveraging (the timing of which it communicated in its year-end 2018 results). "We could revise the outlook to stable if the group appeared increasingly likely to sustainably meet our deleveraging expectations, alongside undertaking prudent portfolio expansion and funding of portfolio acquisitions." MATADOR BIDCO: S&P Assigns (P)BB- ICR on Planned Acquisition ------------------------------------------------------------ S&P Global Ratings assigns a preliminary 'BB-' issuer credit rating to Matador Bidco and a preliminary 'BB-' issue rating and '3' recovery rating to Matador's EUR540 million term loan B. S&P said, "We base our preliminary rating on Matador on our expectation that Matador will acquire 30% of CESPA by the year-end 2019 transaction closure. Matador has no other assets. We rate Matador using our non—controlling equity interest (NCEI) criteria, which we use to rate debt instruments issued by entities that own shares in one or more other entities. "Against this criteria, our preliminary 'BB-' issuer credit rating on Matador Bidco (Matador) is two notches below our 'bb+' stand-alone credit profile on CEPSA. The notching differential reflects the structural subordination of the distributions Matador receives from CEPSA, which it does not fully control. It also reflects differences between Matador's and CEPSA's cash flow stability, corporate governance and financial policy, and financial ratios, as well as Matador's ability to liquidate its investments." Cash flow stability S&P said, "We assess Matador's cash flow stability as "positive" because we expect CEPSA's dividends will be relatively stable through the oil and gas cycle and increase over time. Further supporting this assessment are CEPSA's long track record of distributing dividends, the resilience of its cash flow generation in times of low oil prices, and the diversity of its activities. We also factor in CEPSA's dividends coverage of close to 3x. We consider this relatively robust, therefore allowing for a substantial drop in CEPSA's EBITDA before dividends would need to be cut. We also consider the absence of covenants or restrictions to distribute upstream dividends at CEPSA as positive." Corporate governance and financial policy S&P said, "We assess Matador's corporate governance and financial policy as "positive". Carlyle, via Matador, shares control of CEPSA with Abu Dhabi-based Mubadala Investment Company. Post the transaction, Matador will hold a minimum of 30% of CEPSA, but we understand Carlyle has the option (exercisable before closing) to acquire a total stake of up to 40%. Matador has some influence on most key decisions, including those related to yearly dividend payments. Any changes to financial and dividend policies requires approval of both shareholders, even though Carlyle has only minority representation to CEPSA's board. Furthermore, if shareholders do not agree on a dividend amount in a given year, the basis would be the dividend distributed in 2018 (EUR351 million). We estimate that the dividend payout at CEPSA will be about EUR400 million on average over the next few years, which provides ample headroom to serve the debt obligation of about EUR40 million-EUR45 million a year (including interest payments and amortization). There is a debt service reserve account of EUR40 million at funding, and CEPSA has paid at least EUR200 million dividend each year since 2001, both of which we consider favorable." Financial ratios S&P said, "We assess Matador's financial ratios as "neutral" for the rating. This is because we project interest coverage will be about 3.0x-3.5x and debt to EBITDA (debt divided by dividends received minus operating and administrative expenses) will be about 4x during 2019-2021. In 2019, we expect debt leverage will be about 5x, as a result of increased dividend and debt repayment from the mandatory amortization and the excess cash flow sweep. We project Matador will receive about EUR110 million in dividends in the first year following the transactions, and mandatory debt service of about $45 million (principal and interest) for a debt service coverage ratio of about 2.8x. "We assess Matador's ability to liquidate investments as "negative". This is because Matador is privately held, and it could be difficult to ascertain the future asset value relative to debt with certainty. "The sum of these assessments would reflect a three-notch differential from our 'bb+' stand-alone credit profile on CEPSA. However, we then apply one notch of uplift because we believe that Matador will have more control over dividends compared to peers in other similarly structured transactions. As a result, the preliminary rating is 'BB-'. "The final ratings will depend on our receipt and satisfactory review of all final documentation and final terms of the transaction. Therefore, the preliminary ratings should not be construed as evidence of final ratings. If we do not receive final documentation within a reasonable time, or if the final documentation and final terms of the transaction depart from the materials and terms reviewed, we reserve the right to withdraw or revise the ratings. Potential changes include, but are not limited to, utilization of the proceeds, maturity, size, and conditions of the facilities, financial and other covenants, security, and ranking. "The stable outlook on Matador reflects our expectation that it will maintain adequate liquidity and receive a steady distribution stream from CEPSA. We expect Matador's debt leverage will be about 5x in 2019 as a result of increased dividend and a cashflow sweep. "We could lower the rating if CEPSA's dividend distribution rate decreased to a level that kept Matador's interest coverage ratio below 3x. We could also lower the rating if Matador's debt to EBITDA rose above 5x over a prolonged period." An upgrade is unlikely in the next few years absent an improvement in CEPSA's SACP. This would be possible if CEPSA made further material additions to the scale and diversification of its business, stronger-than-expected market conditions, and funds from operations to debt sustainably above 50%. =========== R U S S I A =========== RTS BANK: Declared Bankrupt by Samara Arbitration Court ------------------------------------------------------- The provisional administration to manage JSC RTS BANK (hereinafter, the Bank) appointed by virtue Bank of Russia Order No. OD-512, dated March 14, 2019, following the banking license revocation, in the course of the inspection of the credit institution established that the Bank's officials conducted operations to divert funds through lending to borrowers with dubious solvency or knowingly unable to meet their obligations to the Bank. The provisional administration estimates the value of the Bank's assets to be no more than RUR0.9 billion, whereas its liabilities to creditors exceed RUR1.3 billion. On May 13, 2019, the Arbitration Court of the Samara Region recognized the Bank as insolvent (bankrupt). The State Corporation Deposit Insurance Agency was appointed as receiver. The Bank of Russia submitted the information on the financial transactions suggestive of criminal offence conducted by the Bank's executives to the Prosecutor General's Office of the Russian Federation and the Investigative Committee of the Ministry of Internal Affairs of the Russian Federation for consideration and procedural decision-making. T2 RTK: Fitch Raises LongTerm IDR to 'BB', Outlook Positive ----------------------------------------------------------- Fitch Ratings has upgraded LLC T2 RTK Holding's Long-Term Issuer Default Rating (IDR) to 'BB' from 'B+'. The outlook is Positive. The two-notch upgrade reflects significant deleveraging with funds from operations (FFO) adjusted net leverage expected at slightly above 3.0x at end-2019 (4.7x at end-2017). This is due to substantial market share gains, sustainably stronger profitability and cash flow generation, and Fitch's revised estimate of lower operating lease expenses. The Positive Outlook reflects the company's strong growth prospects and improving financial performance that is likely to lead to a further reduction in leverage to below 3x. T2 RTK is the fourth-largest facilities-based mobile-only operator in Russia with mobile service revenue market share of approximately 15% at end-2018. The company benefits from close cooperation with Rostelecom (BBB-/Stable), its large strategic shareholder. Rostelecom gives T2 RTK access to its extensive country-wide backbone infrastructure and provides T2 RTK with an opportunity to offer bundled services including fixed broadband and Pay-TV. KEY RATING DRIVERS Maturing New Regions. We believe T2 RTK has achieved sufficient scale across its entire franchise that should allow it to maintain robust profitability. The company has long completed its entry into new regions including in Moscow and successfully grown operations in these territories to a maturity stage so that new regions are no longer a drag on its margins. We expect the company's EBITDA margins to continue gradually improving, reducing the gap to the industry average - the latter is currently in the range of 40%. However, a full catch-up is unlikely in the short to medium term (T2 RTK's EBITDA margin was 30% in 2018). Market Share Gains. T2 RTK has consistently outperformed its peers, and we expect the company to continue gradually growing its revenue and subscriber market shares, albeit at a decelerating pace. We estimate the company's share of mobile service revenue at close to 15% in 2018, from approximately 10% in 2014. While T2 RTK remains the smallest of the four facilities-based mobile operators in Russia, it is no longer a heavy outlier in terms of network coverage or scale, servicing more than 42 million customers at end-2018. Value For Money Proposition. T2 RTK remains focused on offering value-for-money services. This strategy is likely to slow down its market share gains but may help improve profitability and avoid aggressive pricing competition. The company is keen to grow the proportion of heavy data-users that tend to demonstrate lower churn and higher average revenue per user (ARPU) leading to higher life-long value per customer. T2 RTK is actively pushing its flexible 'value for money' tariff plans with less emphasis on cheaper options. Lower Leverage. T2 RTK has dramatically improved its leverage, and Fitch believes further leverage reduction is likely as the company remains focused on growth, sacrificing shareholder distributions for now. The company's FFO adjusted net leverage dropped to 3.3x at end-2018 from 4.7x at end-2017 prompting the two-notch IDR upgrade. Deleveraging was driven by strong growth and margin improvement, including from a positive impact of IFRS 15 introduction in 2018. Also, the operating lease expense used in our calculations starting from the 2018 financial year was revised lower following input from management vs. Fitch's assumption of leases equal to 5% of revenues previously. Fitch said, "We expect leverage to further decline to slightly above 3x at end-2019, primarily driven by stronger EBITDA and FFO generation, and then to below 3x in 2020. We believe the company is likely to start paying dividends in the medium term but FFO adjusted net leverage reduction to below 3x is likely to be sustainable, on par with its key mobile peers in Russia. We do not project a significant decline in total debt as the company is likely to spend most of its internally-generated cash on capex before introducing dividends." Positive Free Cash Flow. "We expect T2 RTK to maintain positive free cash flow (FCF) generation supported by sustainably stronger margins and less aggressive capex. The company's new regions no longer require massive investments, leading to capex stabilizing at below 20% of revenues. Cash flow may benefit from tax savings on the back of accumulated losses including through acquisitions, but these may require corporate reorganization and we do not factor them into our projections," Fitch added. Strategic Relationship with Rostelecom: T2 RTK benefits from a strategic partnership with Rostelecom, its 45% shareholder, including through running various joint synergetic initiatives and having access to Rostelecom's wide back-bone infrastructure. The two companies have an option to offer fixed-mobile bundled services, which may give them an edge over their key peers that lack this option across most of Russia. "We believe any 5G development is likely to be coordinated with Rostelecom, reducing 5G-related capex requirements," said Fitch. Shareholding May Change. Any potential shareholding changes may not be necessarily negative, and Fitch treats them as an event risk. The company's non-strategic shareholders including Bank VTB have long indicated their willingness to exit their investment into T2 RTK once the asset matures and becomes fully self-sustainable. Bank VTB was reported to be in discussions with Rostelecom over its investment in T2 RTK. Wider Funding Options Available. Fitch said, "We believe T2 RTK has an opportunity to diversify its funding options and is no longer critically dependant on funding from shareholder banks and related parties." DERIVATION SUMMARY T2 RTK is the smallest of the four Russian facilities-based mobile operators that also include PJSC Mobile TeleSystems (MTS) (BB+/Stable), PJSC MegaFon (BB/Stable) and VEON Ltd. (BB+/Positive). It still lacks scale and has lower profitability versus its larger peers but is gradually catching up and is no longer heavily disadvantaged in terms of network coverage. T2 RTK is facing stronger growth prospects as it continues to actively capture market share in new regions and increases network utilization through generous data offers. The company is slightly more leveraged than most of its domestic peers that typically target FFO-adjusted net leverage of less than 3x. Although T2 RTK lacks any fixed-line operations, this is addressed by its partnership with its strategic shareholder Rostelecom. KEY ASSUMPTIONS - Mid-single digit revenue growth in 2019-2020 gradually tapering off to low-single digits in 2021-2022 - EBITDA margin gradually improving driven by the focus on higher-value customers and continuing cost discipline - Cash interest costs of above RUB10 billion per year on the back of an only small expected reduction in total debt - Capex in the range of 20% of revenues - No dividends in 2019 and 2020 - Continuing cash taxes on par with 2018 payments RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Strong operating performance with gradually increasing market share and improving FCF generation - FFO-adjusted net leverage stabilizing at below 3x. Developments That May, Individually or Collectively, Lead to Negative Rating Action - A protracted rise in FFO-adjusted net leverage to above 3.5x without a clear path for deleveraging. - Operating under-performance weighing on cash flow generation. =========== S W E D E N =========== SBAB BANK: S&P Lowers Rating on AT1 Hybrids to BB, Off Watch Neg. ----------------------------------------------------------------- S&P Global Ratings said that it has lowered its ratings on the perpetual noncumulative AT1 instruments of SBAB Bank AB (publ) and Landshypotek Bank AB to 'BB' from 'BB+'. S&P also removed these ratings from CreditWatch with negative implications, where they had been placed on Nov. 27, 2018. S&P said, "We downgraded this instrument because we no longer expect the buffer between the bank's regulatory CET1 ratio and the mandatory going-concern trigger to remain above 700 basis points. We see an increased risk of nonpayment, write-down, or conversion; therefore, we have widened the notching we apply to the affected instrument." On Dec. 31, 2018, the Swedish FSA implemented a change to the risk weights it applies for domestic mortgage exposures. It established a hard Pillar 1 requirement under the Basel framework on banks using internal rating-based models. Previously, it had applied institution-specific Pillar 2 requirements. Although this change does not directly affect the regulatory capital requirements in nominal terms, nor S&P measures of risk-adjusted capital and overall creditworthiness of the banks, it reduces the regulatory capital ratios. This has reduced the buffer between the regulatory ratios and the AT1 mandatory going-concern triggers, which are set at 7%. As of March 2019, SBAB reported a consolidated CET1 ratio of 12.4%, while Landshypotek reported a CET1 ratio of 13.4%. S&P no longer expect both banks to maintain CET1 ratios above 14% for the next two years. S&P's rating approach for the banks' AT1 instruments is otherwise unchanged, so they are now rated five notches below the banks' stand-alone credit profile, reflecting our deduction of: -- One notch for contractual subordination; -- Two notches for the instruments' status as Tier 1 regulatory capital; -- One notch because the instruments allow for the full or partial temporary write-down of the principal amount; and -- One notch because S&P expects the banks' CET1 ratios to remain within 700 basis points of the instrument's mandatory conversion trigger point. Ratings List Downgraded; CreditWatch/Outlook Action To From Landshypotek Bank AB SBAB Bank AB (publ) Junior Subordinated BB BB+/Watch Neg =========================== U N I T E D K I N G D O M =========================== BRITISH STEEL: More Than 80 Potential Bidders Emerge ---------------------------------------------------- Michael Pooler at The Financial Times reports that hopes of a British Steel rescue have risen after its liquidators revealed they had been in touch with more than 80 potential bidders, who have been given until early June to register their interest in the stricken company. According to the FT, the official receiver said that "good progress" was being made in the hunt for a new owner for the UK's second-largest steelmaker, which entered into compulsory liquidation last week after its request for an additional state bailout was rejected. "Multiple parties have signed non-disclosure agreements giving them access to a detailed information memorandum and virtual data-room that my team has developed to inform their bids," the FT quotes the official receiver, a civil servant appointed by the High Court to lead the insolvency process, as saying. The accountancy firm EY, which is assisting, has sent non-disclosure agreements to 60 of the prospective buyers, the FT discloses. Among the possible bidders is Liberty House, the industrial conglomerate run by Sanjeev Gupta, which has been monitoring the situation, the FT states. Another is the private equity fund Endless, which was a losing bidder when the business was last sold in 2016, the FT notes. The official receiver said a government indemnity to underwrite the liquidation process has enabled British Steel to continue trading, the FT relays. British Steel employs about 5,000 people, mostly at the Scunthorpe plant in north Lincolnshire. It has blamed its problems on Britain's delayed departure from the EU, which has caused a slump in orders from customers on the continent, the FT recounts. The government this month handed British Steel a short-term loan of GBP120 million to meet the payment, but talks with ministers over an additional GBP30 million funding line broke down, the FT notes. FLYBE GROUP: Chief Executive Officer to Step Down in July --------------------------------------------------------- Josh Spero at The Financial Times reports that the chief executive of low-cost UK carrier Flybe, which narrowly escaped insolvency earlier this year, has said she will step down in July. Christine Ourmieres-Widener took up the job in January 2017, becoming a rare female chief executive in the aviation industry, the FT recounts. She oversaw the tumultuous sale earlier this year of Flybe to Connect Airways, a consortium of Virgin Atlantic, Stobart Air and Cyrus Capital, which stepped in to prevent Flybe from going bankrupt, the FT relates. In March 2018, Stobart Air's parent company, Stobart Group, abandoned plans to buy Flybe after the board rejected its offer", the FT notes. In a previous interview with the FT, Ms. Ourmieres-Widener said Flybe had struggled to become profitable because previous management had ordered "the wrong fleet", a number of Embraer 195 jets, but the carrier was continuing its plan to return them and reduce its fleet to 70 turboprops. According to the FT, the new owners of Flybe are working to recoup tens of millions of pounds being held by companies that process its customers' card payments. Flybe warned in January that it was facing a "very bleak" working capital situation as the credit card acquirers retained cash as collateral in case the airline failed to meet charges for their services, the FT discloses. Flybe, as cited by the FT, said it expected to announce Ms. Ourmieres-Widener's successor before she leaves. Flybe is a British airline based in Exeter. VIRGIN MEDIA: Fitch Affirms 'BB-' LT Issuer Default Rating ---------------------------------------------------------- Fitch Ratings has affirmed Virgin Media Inc's (VMED) Long-Term Issuer Default Rating at 'BB-'. The Outlook is Stable. At the same time, Fitch has affirmed the group's senior secured debt at 'BB+'/'RR2', unsecured notes at 'B'/'RR6'and the receivables financing notes (RFNs) at 'B'/'RR5'. VMED's ratings take into account an operating profile underpinned by its leading market share in residential broadband, the technological superiority of its fiber cable network, consistent operating cash flow and the resilience of operating performance. This business profile is supported by a competitive but rational telecoms market. The rating is constrained by net debt/EBITDA leverage, which management keep towards the high end of a 4x-5x target range With operating cash flow (OCF/EBITDA), of GBP2.2 billion, VMED accounts for more than 40% of its parent, Liberty Global's (LG) consolidated OCF, making it the group's single largest contributor. Heightened M&A risk reflects the high net disposal proceeds generated by LG and the possibility of a merger with or acquisition of a mobile network operator (MNO) in the UK. In any event, Fitch would treat transformational M&A as an event risk. KEY RATING DRIVERS Strong Business Profile: VMED has a strong business profile in a competitive UK telecoms market. The company consistently meets financial guidance and has a good record of delivering low-mid-single digit revenue growth and solid customer growth, in particular in broadband. A disciplined approach to its cost structure despite some content cost inflation provides good visibility of EBITDA margins. Project Lightning network expansion is delivering target operating metrics although the pace of this build is behind original targets. Fitch estimates the company has an in-franchise residential broadband customer share (the part of the market that generates most value) of around 40% and that the cable operator consistently takes around half of quarterly subscriber market growth. This compares with an incumbent, BT's national customer share of around 35% (4Q18), giving VMED an important in-footprint lead. Competitive but Rational UK Market: Fitch considers the UK to be a competitive but rational telecoms market. Content and convergence are important, with BT having made a significant investment in pay-TV built around a strong sports offering, while Europe's leading satellite platform Sky, has used wholesale access to bundle consumer broadband with its leading pay-TV offering in a market where content, in particular sport, and is important. Limitations in the amount of fiber being built by the incumbent (3 million FTTP homes targeted by 2020) are likely to sustain VMED's leading broadband position. Slower Pace of Lightning, KPI Momentum: Project Lightning is the company's network expansion; targeting an additional four million new homes passed. Launched in 2015, VMED has reached 1.6 million homes and is guiding to a roll-out target of around 400,000- 500,000 homes a year. The project is proving slower and capex per home passed is higher than initially planned. However, other performance indicators are evolving well, supporting top-line growth and profitability. Fitch's rating case assumes the build will now continue into 2023 with early vintage take-up generating an incremental EBITDA margin of 60%. 2019 OCF Headwinds: Management is guiding to negative OCF impacts of between GBP110 million-GBP130 million in 2019, the biggest part being expected increases in programming costs of between GBP60 million-GBP80 million. Fitch is therefore assuming some margin pressure - Fitch's rating case assumes an EBITDA margin of 42.7% in 2019 versus 44.5% in 2018. With these headwinds embedded in future forecast years these pressures will continue. Management has a good track record of achieving efficiencies, while the superior margins and growing vintage of Lightning subscribers should allow for margin expansion beyond 2019. Cash Flow, Leverage Constrained: VMED is investing around GBP400 million a year in Lightning-related capex (including customer equipment). With management reporting strong project economics, Fitch views this as a good deployment of underlying cash flow. At more than 40% of LG's consolidated EBITDA, VMED is the group's single largest contributor. LG manages its net debt/EBITDA leverage to an upper limit of 5x. VMED's scale within the group makes its financial leverage a key driver of the overall LG profile. Fitch, therefore, assumes VMED will be managed with leverage of around 5x. Adjusted for Lightning investment, the company exhibits good deleveraging capacity and a free cash flow margin trending upwards of double-digits. M&A Risk: With LG having announced a series of disposals, the group has generated net cash proceeds of around USD16 billion, with management commenting publicly over the possibility of acquisitions; potentially in the UK or Netherlands. The UK remains a four player mobile operator market with past attempts at consolidation rejected by the regulator on competition grounds. Fitch views fixed-mobile consolidation more likely to clear regulatory hurdles and a transaction involving VMED a possibility. Given the cash resources at LG and management's commitment to a 4x-5x leverage range, Fitch believes any transaction would likely to be structured with a degree of discipline. Any deal would be transformational and could result in a spike in leverage. Vendor Financing Structural Ranking: The RFNs (and associated VM facilities) benefit from guarantees from Virgin Media Senior Investments Limited (VMSI) as well as a number of opco obligors, creating structural seniority relative to the group's senior unsecured debt given that the latter is not guaranteed by VMSI. From an organizational perspective, VMSI sits closer to the operating assets of the group. The unsecured debt does not benefit from guarantees from any of the opcos. This structural subordination gives rise to the one-notch difference between the RFNs and the group unsecured debt. DERIVATION SUMMARY VMED's ratings are underpinned by a strong operating profile, developed but rational UK convergent market, technological advantage and broadband-led business strategy. The company's closest peers include fellow LG-owned cable operators, Telenet N.V (BB-/Stable), UPC Holding B.V (BB-/RWP) and VodafoneZiggo Group B.V (B+/Stable). Telenet is potentially its closest peer given the developed stage of their respective business strategies and strong competitive position in their markets. The overall importance of VMED's cash flow to LG and management's stated financial preference mean that VMED's leverage is likely to remain close to historical levels. The deleveraging capacity provided by the company's underlying free cash flow (FCF) and strong operating profile would allow for a higher rating if not for the shareholder's/VMED's stated leverage policy. No Country Ceiling, or parent/subsidiary aspects impact the ratings. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer Revenue growth of around 2-3% over the next few years was driven by Project Lightning and price increases. Decline in EBITDA margin in FY19 to 42.1% as a result of headwinds from programming costs and mobile regulatory changes; thereafter Fitch sees modest margin improvements to 42.8% by FY22. Capital intensity (property & equipment additions including those funded through vendor finance as a percentage of revenue) to remain elevated at around 28%-29% over 2019-2022. FFO net leverage to be maintained at or close to Fitch's downgrade trigger of 5.2x through cash repatriation/ repayment of parent company loans. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action A firm commitment by VMED to a more conservative financial policy (for example, FFO adjusted net leverage of 4.5x). Continued sound operational performance, as evidenced by key performance indicator (KPI) trends and progress in both investment and consumer take-up with respect to Project Lightning. Developments That May, Individually or Collectively, Lead to Negative Rating Action FFO adjusted net leverage expected to remain above 5.2x (2018: 5.2x) on a sustained basis. FFO fixed charge to cover expected to remain below 2.5x (2018: 3.6x) on a sustained basis. Material decline in operational metrics, as evidenced by declining KPIs such as customer penetration, revenue- generating units per subscriber and ARPUs. Evidence that investment in Project Lightning is being scaled to proven demand will be an important driver. ********* 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. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The TCR Europe subscription rate is US$775 per half-year, delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are US$25 each. For subscription information, contact Peter Chapman at 215-945-7000. * * * End of Transmission * * *