/raid1/www/Hosts/bankrupt/TCREUR_Public/191108.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Friday, November 8, 2019, Vol. 20, No. 224
Headlines
B O S N I A A N D H E R Z E G O V I N A
SECERANA BIJELJINA: Dragan Guru Djuragin Eyes Acquisition
C R O A T I A
ULJANIK PLOVIDBA: Renames Business to Alpha Adriatic
ULJANIK: Unfinished Dredger Sold for HRK794MM Via Online Auction
C Z E C H R E P U B L I C
SAZKA GROUP: Fitch Assigns BB- LongTerm IDR, Outlook Stable
F R A N C E
ACCOR SA: Fitch Gives Final BB Rating on EUR500MM Sub. Bond
G R E E C E
PUBLIC POWER: S&P Ups ICR to 'B-' On Similar Action On Sovereign
I R E L A N D
ARDAGH GROUP: S&P Affirms 'B+' LT ICR on Completion of Disposal
BAIN CAPITAL 2019-1: Fitch Assigns B-(EXP) Rating on Cl. F Debt
BAIN CAPITAL 2019-1: S&P Assigns Prelim B-(sf) Rating on F Notes
CAIRN CLO XI: Fitch Assigns B-(EXP) Rating on Class F Debt
CAIRN CLO XI: S&P Assigns Prelim B-(sf) Ratings on Class F Notes
CVC CORDATUS XVI: Fitch Assigns B-(EXP) Rating on Class F Debt
CVC CORDATUS XVI: S&P Assigns Prelim B-(sf) Rating on Cl. F Notes
DEKANIA EUROPE II: Fitch Affirms CC Rating on Class E Debt
DEKANIA EUROPE III: Fitch Affirms Csf Rating on 2 Tranches
L A T V I A
TRASTA KOMERCBANKA: Wins Review of Banking License Withdrawal
L U X E M B O U R G
SUNSHINE LUXEMBOURG VII: Fitch Assigns B IDR, Outlook Stable
N E T H E R L A N D S
E-MAC DE 2006-I: Fitch Affirms CCsf Rating on Class E Debt
N O R W A Y
NORWEGIAN AIR: Taps Investors for Second Time to Secure Future
S L O V E N I A
TELEKOM SLOVENIJE: S&P Withdraws 'BB+' LT Issuer Credit Rating
S P A I N
CAIXABANK CONSUMO 4: Moody's Affirms B1 Rating on Class B Notes
ENCE ENERGIA: Moody's Affirms Ba2 CFR & Alters Outlook to Neg.
S W E D E N
HEIMSTADEN BOSTAD: S&P Rates New Unsecured Subordinated Notes 'BB'
POLYGON AB: Fitch Raises LT IDR to B+, Outlook Stable
POLYGON AB: Moody's Affirms B1 CFR, Outlook Stable
S W I T Z E R L A N D
DUFRY ONE: S&P Assigns 'BB' Rating on New EUR750MM Unsecured Notes
PEACH PROPERTY: Fitch Assigns B+(EXP) LT IDR, Outlook Stable
PEACH PROPERTY: S&P Assigns Prelim. 'B+' ICR, Outlook Positive
U N I T E D K I N G D O M
CONNECT BIDCO: S&P Assigns B+ Issuer Credit Rating, Outlook Stable
FIAT CHRYSLER: S&P Places BB+ ICR on Watch Pos. on Peugeot Merger
FINSBURY SQUARE 2019-3: DBRS Finalizes B(low) Rating on X Notes
HOMEBASE: Cheltenham Store to Close on Dec. 20
LUDGATE FUNDING 2008-W1: S&P Affirms B-(sf) Rating on Cl. E Notes
X X X X X X X X
[*] BOOK REVIEW: Bankruptcy and Secured Lending in Cyberspace
- - - - -
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B O S N I A A N D H E R Z E G O V I N A
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SECERANA BIJELJINA: Dragan Guru Djuragin Eyes Acquisition
---------------------------------------------------------
SeeNews reports that Chinese investor Dragan Guru Djuragin has sent
a letter of interest in the acquisition of Bosnian sugar factory
Secerana Bijeljina.
According to SeeNews, news daily Glas Srpske quoted the bankruptcy
trustee of the sugar mill, Nebojsa Matic, as saying on Oct. 29,
"The buyer is looking for more information on the state of Secerana
Bijeljina."
Mr. Matic said Dragan Guru Djuragin has committed to pay a deposit
of BAM700,000 (US$398,000/EUR358,000) by the end of October,
SeeNews relates.
In early October, Bosnian media reported that Dragan Guru Djuragin
is interested in acquiring Secerana Bijeljina for BAM7 million,
SeeNews notes. The investor intends to start production of sugar
at the factory and employ around 150 people by March, SeeNews
discloses.
In July, Secerana Bijeljina's assets were offered for sale at a
price of BAM10 million but there were no bids, SeeNews recounts.
The assets had been put up for sale several times previously
without success, SeeNews states.
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C R O A T I A
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ULJANIK PLOVIDBA: Renames Business to Alpha Adriatic
----------------------------------------------------
SeeNews reports that Croatian maritime shipping company Uljanik
Plovidba said it is continuing its operations as Alpha Adriatic.
Uljanik Plovidba said in a filing with the Zagreb Stock Exchange on
Oct. 21 that apart from changing its name, in force from Oct. 18,
the company has also changed its visual identity by introducing a
new logo, SeeNews relates.
In August, the company announced plans to rename to Alpha Adriatic
in order to avoid confusion about the company's identity and wrong
associations with other companies, which it did not name, SeeNews
recounts.
Uljanik Plovidba shared part of its name with Croatia's troubled
shipbuilding group Uljanik and its unit Uljanik Shipyard, which
have been under bankruptcy proceedings since May due to overdue
debt, SeeNews discloses.
Earlier in October, a Croatian court opened pre-bankruptcy
proceedings also against Uljanik Plovidba at the company's request
aimed at protecting its employees, creditors and shareholders,
after a syndicate of international lenders led by Credit Suisse
walked out of its debt restructuring talks with Uljanik Plovidba by
seizing its Pomer tanker ship as collateral for an outstanding debt
owed by the company, according to SeeNews.
ULJANIK: Unfinished Dredger Sold for HRK794MM Via Online Auction
----------------------------------------------------------------
SeeNews reports that the unfinished self-propelled cutter suction
dredger built by Croatia's indebted shipyard Uljanik for
Luxembourg-based Jan De Nul Group has been sold for HRK794 million
(US$118.5 million/EUR106.5 million) via an online auction.
According to SeeNews, state broadcaster HRT reported on Oct. 24 the
buyer is still unknown, but is believed to be Jan De Nul itself.
Earlier this year, the Croatian government had to pay HRK900
million in activated state guarantee to Jan De Nul after Uljanik
failed to deliver on its shipbuilding contract with the company,
SeeNews discloses.
Subsequently, the commercial court in Pazin launched in May
bankruptcy proceedings against Uljanik Shipyard and the umbrella
company Uljanik Group over their financial woes, SeeNews relates.
The court set in July the value of the unfinished dredger built by
Uljanik for Jan De Nul Group at HRK1.59 billion, saying its sale
will be carried out by the country's financial agency Fina via an
online auction, SeeNews notes.
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C Z E C H R E P U B L I C
===========================
SAZKA GROUP: Fitch Assigns BB- LongTerm IDR, Outlook Stable
-----------------------------------------------------------
Fitch Ratings assigned Sazka Group a.s a Long-Term Issuer Default
Rating of 'BB-' with Stable Outlook. It has assigned its debut
planned EUR300 million senior unsecured notes an expected
instrument rating of 'BB-(EXP)'/'RR4'.
The assignment of the final instrument rating is contingent on the
receipt of final documents conforming to information already
received.
The 'BB-' IDR of Sazka Group reflects its leading market positions
in the Czech, Italian, Austrian and Greek gaming and lottery
markets, and its fairly steady revenue streams from lottery
activities. It also factors in high-quality dividends from
controlling and non-controlling stakes, which translate into solid
debt service capabilities at Sazka Group (holdco). The IDR is
constrained by fairly high leverage (funds from operations (FFO)
lease-adjusted gross leverage on a proportionally consolidated
basis), which Fitch estimates at 5.2x for end-2019 before trending
to 4.3x by 2021.
Fitch estimates under its rating case that structurally senior
gross debt at both operating and intermediate holding companies
will represent around 2.5x and 2.2x of proportionally consolidated
EBITDA by end-2019 and -2020 respectively, before falling to 1.8x
by 2021 and 1.3x by 2023. This will not trigger any material
structural subordination for Sazka's prospective bondholders.
KEY RATING DRIVERS
Leading European Lottery Operator: Sazka Group's main revenue
source is from mature but stable national lottery schemes at around
75% of total group revenue. Sazka Group is the longest established
lottery gaming and betting operator in the Czech Republic with a
leading market position and 95% market share. It has an extensive
network of 11,200 points of sales, together with a comprehensive
online games and entertainment platform.
Following the acquisition of shareholding stakes in leading lottery
operations in other central and southern European jurisdictions
(such as OPAP's in Greece) Sazka Group has become the largest
European private lottery operator. Sazka Group holds equity
participations in gaming companies with strong competitive
positions in Greece and Italy (number 1 lottery operator in both)
and in Austria (number 1 lottery and land-based casinos).
Geographical Diversification Mitigates Regulatory Risks: Fitch
believes the regulatory environment for lottery games is more
stable and less susceptible to government interference than other
types of gambling, such as sports-betting and casino games.
However, regulatory risk still exists, and given Sazka Group's
exposure to some heavily indebted European sovereigns, the group
could face gaming tax increases and/or possible limits on wagers
that could restrict future cash flows. The geographical
diversification should allow it, however, to weather any adverse
regulatory change in any one particular country over the next four
years.
Shift towards Online: Gaming is undergoing a structural shift
towards more online and mobile app betting, which requires both
increased capex in IT and software systems as well as active
marketing and promotional programmes. While online gaming
regulations are fairly new in some countries such as the Czech
Republic, Greece and Italy, they are already showing higher
penetration rates in Austria, reflecting an earlier implementation
of online regulations. Fitch expects the group to continue to
generate positive cash flow as it rolls out more retail and online
products such as e-casino and virtual games, scratch cards, VLT,
notably in Greece and sports betting in its main markets.
Strong Cash Flow Generation: The rating reflects the high-quality
and steady dividend stream from controlled subsidiaries (OPAP and
Sazka a.s.) as well as non-controlling stakes (CASAG and
LottoItalia). Fitch expects cash flow available after debt service
at Sazka Group (holdco level) between EUR150 million and EUR180
million per annum.
High Margins: Sazka Group's consolidated EBITDA margin is high by
gaming industry standards (32% expected in 2019, proforma for the
divestment of the Croatian business SuperSport), which Fitch
expects to remain stable over the next four years. Fitch estimates
free cash flow (FCF) will be above 15% of "sales" (defined as net
gaming revenue (NGR)) on a fully consolidated basis for the next
four years. As Sazka Group combines both retail and digital-betting
offerings, this enhances its ability to improve brand and product
awareness as well as customer retention through enhanced
multi-channel and marketing initiatives, improving margins and cash
flow resilience.
Fairly High Leverage: As consolidation progresses in the European
gaming sector, Sazka Group has completed significant debt-funded
acquisitions in the last three years. This has led us to project
high FFO-lease adjusted net leverage of around 4.5x at end-2019
(5.2x gross), on a proportionally consolidated basis This is
sustainable as the business generates strong FCF and should reduce
proportionally consolidated leverage on a net basis towards 2.9x
(gross: 4.3x) by 2021.
Complex Group Structure: Sazka Group has a fairly complex group
structure, including consolidated entities with significant
minority interests and equity-accounted investments, which result
in significant cash leakage when dividends are up-streamed to Sazka
Group at holdco level (around 65% of dividends paid by operating
companies). The group's capital structure also includes priority
debt at either intermediate holding or operating company levels
that needs to be serviced before cash is up-streamed to Sazka
Group.
Robust Debt Service Coverage: Given lack of contractual debt
repayments at Sazka Group (holdco) in the next four years Fitch
estimates strong dividend-to-debt service ratio of at least 5.5x
until 2023. Fitch expects control of OPAP's board of directors, and
therefore of OPAP's dividend policy, as well as the current pattern
of dividend distributions of CASAG and LottoItalia (which are
entities not controlled by Sazka Group) will continue over the next
four years. FFO fixed charge cover ratios between 3.9x and 5.9x
over the next four years under its rating case support robust debt
service capability. These metrics are calculated based on Fitch
methodology by applying proportional consolidation.
Reduced Structural Subordination Likely: Fitch expects the proposed
EUR300 million notes will repay 43% of the outstanding debt at
intermediate holding companies. However, around EUR308 million
remain outstanding contractually and structurally senior to the
proposed notes, in addition to EUR446 million in
proportionally-consolidated operating company debt (together
priority debt), or around 2.5x EBITDA. This leaves limited margin
for incurring additional debt below holdco level.
Fitch does not notch down the planned EUR300 million notes rating
at Sazka Group holdco as priority debt should decline due to
contractual debt repayments primarily at intermediate holding
level, and trending below 2.0x EBITDA over the next four years.
DERIVATION SUMMARY
Sazka Group's profitability, measured by EBITDA and EBITDAR
margins, is strong relative to 'BB' category peers in the gaming
sector, such as GVC Holdings Plc (BB+/Stable) - one of the largest
sportsbook operators in the world. This is complemented by good
funds from operations throughout the cycle, resulting in resilient
FCF and adequate financial flexibility. Sazka Group also displays
good geographical diversification across Europe with businesses in
the Czech Republic, Austria, Greece, and Italy, albeit weaker than
GVC.
However, while Sazka Group concentrates on less revenue volatile
lotteries, it has higher leverage than GVC, and a more complex
group structure with some structural and contractual subordination
for Sazka Group's debtholders although, currently, this does not
result in a notch-downgrade on the senior unsecured rating.
KEY ASSUMPTIONS
- High mid-single digit growth in net gaming revenues (NGR) in
2019 and 2020 and 4% p.a. thereafter.
- EBITDA margin stable towards 32%.
- Consolidated FCF to remain above 15% of NGR.
- Dividend payments lower compared with prior two years and
include distribution of recurring income from share repurchases at
LottoItalia regarding return of licence fees.
- No change in regulations and taxation in main markets, except
those already announced.
Recovery Assumptions:
Post-acquisition of OPAP's additional shares (7% take-up), Sazka
Group's debt structure is fairly complex with EUR795 million (or in
equivalent currencies) sitting at intermediate and operating
company levels. The planned notes at Sazka Group holdco level will
be only guaranteed by SAZKA Czech a.s. (wholly-owned Czech
subsidiary accounting for around 25% of proportionally consolidated
EBITDA) and rank pari passu with other debt at the same level.
Based on Fitch's transitional approach under its Recovery Ratings
methodology, Fitch expects Sazka Group's priority debt to
proportionally consolidated EBITDA to be 2.5x in 2019, and to fall
thereafter, thus limiting the risk of material structural
subordination for bondholders at Sazka Group.
Bondholders will have direct recourse to its Czech subsidiary from
its direct guarantee, in addition to the value stemming from Sazka
Group's controlling and minority interests. However, this is
insufficient to provide any credit enhancement to the rating of the
notes. Therefore Fitch expects average recovery prospects for Sazka
Group's unsecured creditors in the event of default (i.e. RR4
within the band of 31% - 50% recoveries).
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Positive Rating Action
- Reduced group structure complexity for example via falling
intermediate debt and overall priority debt -to-EBITDA
(proportionally consolidated) below 2.0x
- Further strengthening of operations with an established
competitive profile in on-line gaming, a fully stabilised Czech
retail business and lower reliance on the Czech market
- Proportionally consolidated FFO lease-adjusted net leverage
sustainably below 4.0x (expected for 2019: 4.5x), due to
sustainably growing dividend flows from equity stakes
- Proportionally consolidated FFO fixed charge cover above 3.0x
and gross dividend/ gross interest ratio at Sazka Group above 2.5x
on a sustained basis
Developments That May, Individually or Collectively, Lead to
Negative Rating Action
- Evidence that any future cash raised at Sazka Group is not used
to repay operating company and/or intermediate debt, and increasing
dividend payment to the ultimate parent of Sazka Group
- More aggressive financial policy reflected in proportionally
consolidated FFO lease-adjusted net leverage sustainably above
5.5x
- Proportionally consolidated FFO fixed charge cover below 2.0x
and gross dividend/interest at holdco of less than 2.0x on a
sustained basis
- Poor trading and/or increased regulation and taxation leading
to consolidated EBITDA margin falling below 25% on a sustained
basis
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Fitch expects solid liquidity on proportional
consolidated basis with cash in hand of EUR216 million by end-2019.
This will be supplemented by projected robust FFO fixed charge
coverage ratio under its rating case of 4.3x in 2019, trending
towards 4.5x by 2021 and 5.9x by 2023.
Fitch also expects ample liquidity headroom at Sazka Group
(holdco), driven by projected EUR98 million of cash in hand by
end-2019 building up to EUR292 million by 2021 under its rating
case. Additionally, Fitch expects robust debt service coverage
ratios at Sazka Group of 5.5x to 6.0x over the next four years,
benefiting from steady dividends being up-streamed through the
group structure and the absence of scheduled debt repayments at the
holding level over the same period.
Reported liquidity was sound at December 31, 2018 with EUR313
million of cash on balance sheet on a fully consolidated basis.
There are no revolving facilities in place as the group is highly
cash-generative, receiving cash upfront from punters and always has
a significant amount of cash in hand. However, Fitch has restricted
EUR30 million put aside for winnings and jackpots.
SUMMARY OF FINANCIAL ADJUSTMENTS
Fitch's credit metrics are based on the proportionate consolidation
of the stake in the Greek operations (OPAP), and dividends
up-streamed only from equity stakes in the Italian (LottoItalia)
and Austrian operations (CASAG). This differs from the group
management's definition of proportionate consolidation as well as
published financials, which are shown on a fully-consolidated
basis.
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F R A N C E
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ACCOR SA: Fitch Gives Final BB Rating on EUR500MM Sub. Bond
-----------------------------------------------------------
Fitch Ratings assigned Accor SA's (Accor; BBB-/Stable) EUR500
million undated non-call 5.5-year deeply subordinated
fixed-to-reset-rate bond a 'BB' final rating.
The hybrid issue is deeply subordinated and ranks senior only to
Accor's share capital, while coupon payments can be deferred at the
discretion of the issuer. As a result the 'BB' rating is two
notches below Accor's 'BBB-' Issuer Default Rating (IDR),
reflecting the notes' higher loss severity and risk of
non-performance relative to senior obligations.
The securities qualify for 50% equity credit as they meet Fitch's
criteria with regard to subordination, remaining effective maturity
of more than five years, full discretion to defer coupons for at
least five years and limited events of default. Deferrals of coupon
payments are cumulative and there are no look-back provisions.
The hybrid is callable 5.5 years after its issue date (first
step-up date) and every year subsequently on any interest payment
date. The first call date at the option of Accor will be in April
2025. There will be a coupon step-up of 25bp at the first step-up
date and an additional step-up of 275bp 20 years thereafter. The
deeply subordinated bonds are perpetual notes with no legal
maturity date.
The hybrid instrument has been used to repay EUR385.6 million of
Accor's remaining existing EUR514.1 million hybrid (originally
EUR900 million), while the group has stated their intention to
maintain the current size of hybrid debt (around EUR1 billion) in
its capital structure. The new hybrid issue ranks pari passu with
the remaining portion of the existing hybrid instrument and with
the EUR500 million undated deeply subordinated notes issued in
January 2019.
KEY RATING DRIVERS
Transformation to Asset-light Ongoing: After the completion of the
sale of 65% of AccorInvest, (the entity owning or leasing the
hotels) to institutional investors in 2018, Accor's business model
is mostly asset-light, with long-term assets essentially made up of
goodwill and other intangibles such as trademarks. This asset-light
model mirrors that of other U.S. lodging groups. The recurrent fee
nature and the underlying diversified brand portfolio help mitigate
revenue and EBITDA volatility in a cyclical sector, which remains
subject to sharp moves in occupancy rate and/or pricing.
Further Monetisation of Assets Expected: The main exception to this
asset-light portfolio is Orbis, which is asset-heavy. Fitch views
the recent acquisition of 33% of Orbis's shares, increasing Accor's
ownership in Orbis to 85.8% and the acquisition of its services
business (franchise agreements and management contracts), as a
necessary intermediate step towards the continuation of this
transformation through further potential monetisation of assets.
Broader Geographic Diversification: Europe currently accounts for
less than 50% of total fee revenue and remains Accor's core market.
Its growth plans lie mainly in Asia and MEA regions, as illustrated
by the Mantra and Movenpick acquisitions. This geographic
diversification strategy is positive for the rating, as it
mitigates a potential decline in a particular region. Accor has a
modest presence in the US, which is not a target area for the group
given the competitive landscape.
Short-Term Pressure on Margins: Integration costs, the deceleration
of some Asian markets, and the start-up costs of a new marketing
plan are expected to put pressure on margins in the short-term, but
Fitch forecasts a positive return from these initiatives with
EBITDA margins increasing towards 24% by 2022. The group reported
solid operating performance in 2018 with fee revenue up 7.2%,
driven by a 5.6% revenue per available room (RevPAR) growth
(recovery of rates particularly in Latam and Europe) and increased
occupancy rates. During 9M19 RevPar growth slowed as a result of
challenges in APAC but like-for-like revenue growth at 4.5%
remained in line with its expectations. EBITDA margin was slightly
lower (2018: 19.7%) due to the impact of asset-heavy acquisitions.
Deleveraging Still to Materialise: Total debt has increased with
the recent refinancing (a new EUR600 million bond, a EUR300 million
loan and a EUR500 million perpetual bond - issued in January 2019 -
the latter of which benefits from 50% equity credit as per Fitch's
criteria), which has been used to repay near-term maturities and
the acquisition of Accor's headquarter building. In parallel, the
transformation to an asset-light hotel operator (substitution of
room revenue by fees) will lower funds from operations (FFO). Fitch
estimates that Accor's FFO adjusted gross leverage will therefore
increase temporarily. Fitch expects the gross and net FFO leverage
metrics - forecasted at 5.8x and 3.4x respectively for 2019 - to
gradually converge and to stabilise at levels consistent with a
'BBB-' investment-grade rating.
Strengthened Position in Luxury Segment: Fitch believes Accor's
strategy of moving more upmarket - as demonstrated by the Movenpick
and SBE acquisitions in April and June 2018, respectively - would
make the group's business model more competitive relative to
disruptive hospitality operators. Premium and upscale hotel guests
(both business and leisure) are generally willing to pay for
high-quality services (e.g. fine-dining, 24-hour room service,
valet parking, fitness centres, spas, reliable internet and
security conditions) that Airbnb does not offer. In 2018, 38% of
management fees came from the luxury segment.
Leader Player Focused on Value Creation: Accor has been acquisitive
during the last year, with more than EUR2 billion spent on M&A,
which has consolidated the group as one of the industry leaders,
particularly in Europe. Accor will now focus its strategy on
developing its main asset, the intangibles, as it operates as a
business service company. Its EUR225 million announced marketing
plan will prioritise marketing initiatives, global sales
distribution, loyalty and brand awareness, which should lay the
foundation for solid recognition of its franchise management and
contracts worldwide.
DERIVATION SUMMARY
Accor's IDR is well-positioned relative to that of European
competitors, NH Hotel Group SA (B+/Stable) and Radisson Hospitality
AB (B+/Stable) on each major operating factor. Accor has a lower
scale than major global peers such as Marriott International Inc.
(BBB/Stable) and Intercontinental Hotel Group based on number of
rooms although it has wider geographical diversification after
consistently expanding across all continents, including in Asia.
Accor operates with a 19.7% EBITDA margin (2018), below that of
players with a similar portfolio mix such as Marriott, and its
leverage is also higher than that of main 'BBB' rating category
peers with a temporary 5.8x FFO lease-adjusted gross leverage as a
result of the ongoing group transformation. Fitch expects Accor's
credit metrics to improve to levels that are more in line with
those of Marriott, given the groups' increasingly comparable
asset-light business models.
KEY ASSUMPTIONS
- Revenue growth in mid-single digits, driven by more than
190,000 new room openings and low single- digit RevPar growth.
- Transformation towards the asset-light model with the
monetisation of Orbis and remaining asset-heavy structures.
- EBITDA margin trending towards 24% over 2019-2022 from 19% in
2018.
- EUR250 million of capex per year, as per Accor's guidance, in
addition to the estimated EUR225 million marketing plan - to be
spread over four years - being deducted from EBITDA.
- Use of excess cash for different types of shareholder returns
totalling EUR1.8 billion, spread over four years (this is
exclusively Fitch's forecast assumption).
- Stable ordinary dividend policy.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Positive Rating Action
- Successful growth of room numbers under management, including
through well-targeted acquisitions.
- Convergence between FFO lease-adjusted gross and net leverage
(adjusted for variable leases), sustainably reducing towards 4.0x
(gross) and 2.5x (net), with lease-adjusted net debt /EBITDAR
(adjusted for variable leases) ratio remaining below 3.0x.
- Lease-adjusted EBITDAR/gross interest plus rents ratio above
2.5x (2018: 3.9x).
- Sustained positive free cash flow (FCF).
Developments That May, Individually or Collectively, Lead to
Negative Rating Action
- Negative development of room pipeline and/or cancellation of
management contracts and/or large acquisitions outside Accor's core
activities.
- FFO-adjusted gross leverage (adjusted for variable leases)
sustainably remaining above 5.0x and lease- adjusted net
debt/EBITDAR (adjusted for variable leases) above 4.0x beyond
2020.
- Lease-adjusted EBITDAR/gross interest plus rents below 2.0x.
- Neutral or volatile FCF (post ordinary dividends).
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Accor had EUR2.8 billion readily available cash
at end-2018 following the disposal of AI compared with EUR343
million in short-term debt. The next large debt maturity is in
2021, when the remaining part of the bond not amortised with the
new debt issue is due. Accor reduced its revolving credit facility
to EUR1.2 billion (maturing in 2023) in July 2018 after the
completion of the AI transaction, reflecting lower operational
needs. The EUR600 million senior unsecured notes issued in January
2019 cover near-term maturities and have extended the group's debt
maturity profile. In February 2019, Accor established a EUR500
million NEU CP programme to optimise the cost of debt and diversify
sources of short-term financing.
The level of cash left in the business, which Fitch would view as
readily available for debt service instead of being earmarked for
acquisitions or shareholder remuneration, should remain at a
minimum of EUR1 billion, even with the increase in Orbis's
ownership, a share buyback programme or any other excess cash
allocation.
Ring-fenced AI: Accor will continue to own 30% of AI until at least
2023 (currently 35%), but its debt is totally ring-fenced from
Accor's and Accor is not liable for it.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of 3. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or to the way in which they are being
managed by the entity.
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G R E E C E
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PUBLIC POWER: S&P Ups ICR to 'B-' On Similar Action On Sovereign
----------------------------------------------------------------
S&P Global Ratings upgraded its long-term issuer credit rating on
Greek utility Public Power Corp. S.A. (PPC) to 'B-' from 'CCC+'.
The outlook is stable.
At the same time, S&P raised the issue rating on PPC's EUR1.09
billion syndicated loans with Greek banks. S&P no longer assigns a
recovery rating to this debt.
Greece's ability to provide support to PPC has increased.
The upgrade of PPC follows our upgrade of Greece on Oct. 25, 2019.
S&P believes that Greece now has an increased capacity to provide
timely and sufficient support to PPC in the event of financial
distress. This is because of its Greece's improved credit quality
given stronger economic conditions and improved funding capacity.
PPC is the dominant Greek power generator and the monopoly power
distributor in the country. S&P said, "In our view, PPC benefits
from moderate support from the Greek government, which indirectly
owns 51% of the company. We continue to believe that there is a
moderate likelihood that PPC would receive timely and sufficient
extraordinary support from the government. Our rating on PPC now
includes one notch of uplift for extraordinary support relative to
PPC's stand-alone credit profile of 'ccc+'."
S&P continues to view PPC's stand-alone credit quality as fragile
given ongoing weak market fundamentals, which leaves PPC's capital
structure still weak.
The main challenge for PPC is to transform its strategy in order to
reduce dependency on fossil fuels, and shift its energy generation
mix toward renewables. Should the recently elected government
implement its proposal to decommission the Greek lignite-fired
fleet by 2028, this could happen more quickly. PPC is in the
process of aligning its business strategy with the Greek National
Energy and Climate plan (NECP), and S&P expects to have visibility
on the revised plan over the coming months.
In addition, European competition regulations stipulate that PPC
must reduce its market share in generation and retail to below 50%
by the end of 2019 (currently under renegotiation). At the end of
2018, PPC's market share was 61% in generation and 80% in retail;
hence, S&P does not believe PPC will comply with the regulation by
the end of 2019. As a result, it could be subject to financial
penalties, but it views this unlikely.
PPC's financial performance has remained relatively weak over the
last 18 months. The results of first-half 2019 are in line with
the 2018 results.
S&P said, "However, we expect PPC's adjusted EBITDA will reverse
the negative trend and increase to about EUR485 million in 2019
from EUR315 million in 2018, while adjusted net debt should remain
relatively stable at about EUR4.4 billion. This would lead our
forecasted FFO to debt ratio to increase to 6%-7% at the end of
2019 from 0% in 2018, and debt to EBITDA to decline to about 9.0x
in 2019 from 13.5x in 2018." S&P's expectations for a recovery in
credit ratios are underpinned primarily by:
-- Several tariff adjustments effective as of Sept. 1 2019, which
should increase PPC's revenue per customer but also protect the
company against CO2 prices for all customers. S&P understands that
the tariff adjustments would be almost neutral for the customers.
-- Abolishment of the new NOME (a special purpose regulatory
mechanism) auctions from October 2019. S&P expects the effect will
be gradual because certain NOME quantities will have to be
delivered in 2019 and 2020 from previous auctions . NOME was a
mechanism that obliged PPC to sell part of their generation in
scheduled auctions (16% of the annual demand for 2017, 19% for
2018, and 22% for 2019). The price at auction was below market
conditions, which had a significant effect on PPC's EBITDA (EUR224
million in 2018 and EUR72 million in 2017).
-- Abolishment of the charge imposed on electricity suppliers for
the "Special Account for Renewables" from Jan. 1, 2019.
The stable outlook on PPC reflects S&P's view that PPC's
stand-alone credit quality remains weak due to ongoing weak market
fundamentals, raising concerns regarding the company's long-term
sustainability.
S&P could raise the long-term rating by one notch if PPC meets both
of the following conditions:
-- PPC's transformation process progresses successfully and the
company demonstrates capacity to deleverage its balance sheet. This
would lead S&P to consider PPC's position as sustainable over the
long term; and
-- S&P raises its rating on Greece to 'BB'.
S&P said, "We would take a negative rating action if PPC's
liquidity weakens, specifically if the company fails to secure in
advance its liquidity needs within the next 12 months, or announces
a debt renegotiation or haircut that we consider distressed, with
no immediate support from the government.
"Should this be the case and we revised PPC's SACP to 'ccc' from
'ccc+', and did not include the benefit of government support, and
we would then downgrade PPC by two notches to 'CCC'."
=============
I R E L A N D
=============
ARDAGH GROUP: S&P Affirms 'B+' LT ICR on Completion of Disposal
---------------------------------------------------------------
S&P Global Ratings affirmed its 'B+' long-term issuer credit
ratings on Ardagh Group S.A. (Ardagh) and its subsidiaries. S&P has
assigned its 'B-' issue rating to the proposed $2.215 billion
toggle notes due 2027.
S&P said, "Our rating affirmations follow Ardagh completing the
sale of its food and specialty metal packaging division for $2.5
billion. It has sold the division to a joint venture owned by
Canada-based pension fund OTTP (57%) and Ardagh (43%).
"We understand Ardagh will use all the disposal proceeds to meet
debt repayments in November 2019. We will remove our recovery and
issue ratings on the notes (around $2.5 billion) upon completion of
the repayments. Ardagh will repay a combination of secured and
unsecured notes and about $108 million of drawings under its
asset-backed lending (ABL) facility. Ardagh already reduced the
size of its ABL facility to $700 million from $850 million.
"The disposal does not materially affect our rating on Ardagh. The
rating factors in Ardagh's satisfactory business risk profile and
highly leveraged financial risk profile. The business risk profile
captures the group's leading market position, large size,
longstanding customer relations, cost-efficient operations, and
stable end-markets, as well as its exposure to two substrates
(glass and metal). On the other hand, our assessment also reflects
the commoditized nature of Ardagh's products, its customer
concentration, and exposure to volatile input costs.
"We forecast S&P Global Ratings-adjusted debt to EBITDA of 7.3x at
Dec. 31, 2019, pro forma the disposal. Pro forma adjusted funds
from operations (FFO) to debt should improve to 10%-12%. The credit
ratios remain commensurate with our highly leveraged financial risk
profile category.
"Ardagh has also announced the proposed issuance of $2.215 billion
of deeply subordinated toggle notes. The notes are due 2017 and
will be issued by ARD Finance. We have rated them 'B-'. The
proceeds will be used to refinance around $2.09 billion in
subordinated notes issued by ARD Finance and ARD Securities
Finance.
"We will withdraw our 'B-' issue ratings and '6' recovery ratings
on ARD Finance's payment-in-kind (PIK) toggle notes due 2023 (about
$1.7 billion) and ARD Securities Finance's $350 million PIK notes
due 2023 when the proposed refinancing completes.
"We will also remove our 'B-' issuer credit ratings on ARD
Securities because all of its debt will have been repaid.
"The stable outlook reflects that Ardagh's credit metrics should
remain commensurate with our highly leveraged financial risk
profile category. We expect revenues to grow in line with GDP and
pro forma leverage of 7.0x-7.5x over the next 12 months.
"We could lower the ratings if Ardagh's financial policy became
more aggressive amid a large purely-debt-funded acquisition or
dividend payment. We could also consider a downgrade if Ardagh's
profitability deteriorated due to freight or raw material cost
increases that it was not able to pass on to customers, or a
substantial decline in demand for glass packaging in the U.S. If
the business faced material quality problems, or the loss of a key
customer, this would also pressure the ratings.
"We could raise the ratings on Ardagh if its credit metrics
improved substantially, with net debt to EBITDA improving to 5.0x
or below and FFO to debt exceeding 12% on a sustainable basis."
BAIN CAPITAL 2019-1: Fitch Assigns B-(EXP) Rating on Cl. F Debt
---------------------------------------------------------------
Fitch Ratings assigned Bain Capital Euro CLO 2019-1 Designated
Activity Company expected ratings as detailed.
The assignment of the final ratings is contingent on the receipt of
final documents conforming to information already reviewed.
Bain Capital Euro CLO 2019-1 DAC
Class A; LT AAA(EXP)sf; Expected Rating
Class B; LT AA(EXP)sf; Expected Rating
Class C; LT A(EXP)sf; Expected Rating
Class D; LT BBB-(EXP)sf; Expected Rating
Class E; LT BB-(EXP)sf; Expected Rating
Class F; LT B-(EXP)sf; Expected Rating
Class M-1 Sub. Notes; LT NR(EXP)sf; Expected Rating
Class M-2 Sub. Notes; LT NR(EXP)sf; Expected Rating
TRANSACTION SUMMARY
Bain Capital Euro 2019-1 DAC is a cash flow CLO of mainly European
senior secured obligations. Net proceeds from the issuance is being
used to fund a portfolio with a target par of EUR400 million. The
portfolio is managed by Bain Capital Credit US CLO Manager, LLC,
Series C. The CLO envisages a 4.3-year reinvestment period and an
8.5-year weighted average life.
KEY RATING DRIVERS
'B' Portfolio Credit Quality
Fitch places the average credit quality of obligors in the 'B'
category. The weighted average rating factor of the identified
portfolio calculated by Fitch is 32, below the maximum indicative
covenant of 33.5%.
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 weighted
average recovery rating (WARR) of the identified portfolio
calculated by Fitch is 67.2%, above the minimum indicative covenant
of 64%.
Diversified Asset Portfolio
The transaction has several Fitch test matrices corresponding to
different obligor and fixed-rate asset limits. The manager can then
interpolate within/between these matrices. The indicative top 10
obligors and maximum fixed-rate limit for assigning the expected
ratings is 20% and 10% respectively. The transaction also includes
various concentration limits, including the maximum exposure to the
three largest (Fitch-defined) industries in the portfolio at 40%.
These covenants ensure that the asset portfolio will not be exposed
to excessive concentration.
Portfolio Management
The transaction features a 4.3 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 and the various structural
features of the transaction, and to assess their effectiveness,
including the structural protection provided by excess spread
diverted through the par value and interest coverage tests.
The class F notes present a marginal model failure of -0.5% when
analysing the stress portfolio. Fitch has assigned an expected
'B-sf' rating to the class F notes given that the breakeven default
rate is higher than the 'CCC' hurdle rate based on the stress
portfolio and higher than the 'B-' hurdle rate based on the
identified portfolio. As per Fitch's definition, a 'B' rating
category indicates that material risk is present, but with a
limited margin of safety, while a 'CCC' category indicates that
default is a real possibility. In Fitch view, the class F notes can
sustain a robust level of defaults combined with low recoveries.
RATING SENSITIVITIES
A 125% 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 four notches for the rated notes.
BAIN CAPITAL 2019-1: S&P Assigns Prelim B-(sf) Rating on F Notes
----------------------------------------------------------------
S&P Global Ratings assigned preliminary credit ratings to the class
A to F European cash flow CLO notes issued by Bain Capital Euro CLO
2019-1 DAC. At closing, the issuer will issue unrated subordinated
notes.
The preliminary ratings reflect S&P's assessment of:
-- The diversified collateral pool, which consists primarily of
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
-- The transaction's legal structure, which S&P expects to be
bankruptcy remote.
-- The transaction's counterparty risks, which S&P expects to be
in line with its counterparty rating framework.
Under the transaction documents, the rated notes will pay quarterly
interest unless there is a frequency switch event. Following this,
the notes will permanently switch to semiannual payment.
S&P said, "Our preliminary ratings reflect our assessment of the
preliminary collateral portfolio's credit quality, which has a
weighted-average 'B' rating. We consider that the portfolio on the
effective date will be well-diversified, primarily comprising
broadly syndicated speculative-grade senior secured term loans, and
senior secured bonds. Therefore, we have conducted our credit and
cash flow analysis by applying our criteria for corporate cash flow
CDOs.
"In our cash flow analysis, we used the EUR400 million target par
amount, the covenanted weighted-average spread (3.65%), the
covenanted weighted-average coupon (5.00%), and the covenanted
weighted-average recovery rates for all rating levels. As the
portfolio is being ramped, we have relied on indicative spreads and
recovery rates of the portfolio."
Target Portfolio Metrics
S&P weighted-average rating factor 2,616
Default rate dispersion 638
Weighted-average life 5.5 years
Obligor diversity measure 132
Industry diversity measure 25
Regional diversity measure 1.4
'CCC' assets 0.75%
AAA WARR 38.13%
WARR--Weighted-average recovery rate.
Until the end of the reinvestment period, the collateral manager is
allowed to substitute assets in the portfolio for so long as our
CDO Monitor test is maintained or improved in relation to the
initial ratings on the notes. This test looks at the total amount
of losses that the transaction can sustain as established by the
initial cash flows for each rating, and compares that with the
default potential of the current portfolio plus par losses to date.
As a result, until the end of the reinvestment period, the
collateral manager can, through trading, deteriorate the
transaction's current risk profile, as long as the initial ratings
are maintained.
Prior to the purchase of any asset, the collateral manager will
request the collateral administrator to test compliance with the
reinvestment conditions. The collateral manager may proceed with
the purchase even if they have not received confirmation from the
collateral administrator. The collateral manager still has to
comply with the reinvestment conditions, in accordance with its
standard of care.
S&P said, "Under our structured finance ratings above the sovereign
criteria, the transaction's exposure to country risk is
sufficiently mitigated at the assigned preliminary rating levels.
"The Bank of New York Mellon, London Branch is the bank account
provider and custodian. At closing, we anticipate that the
documented downgrade remedies will be in line with our current
counterparty criteria.
"At closing, we consider that the issuer will be bankruptcy remote,
in accordance with our legal criteria.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe our preliminary ratings
are commensurate with the available credit enhancement for each
class of notes."
Transaction key dates
-- End of reinvestment period: July 15, 2024
-- End of non-call period: Jan. 15, 2022
-- Maximum weighted-average life: 8.5
Ratings List
Class Preliminary rating Preliminary amount (mil. EUR)
A AAA (sf) 250.00
B AA (sf) 40.00
C A (sf) 27.60
D BBB (sf) 23.40
E BB (sf) 21.00
F B- (sf) 10.40
M-1 sub NR 32.10
M-2 sub NR 0.50
NR--Not rated.
CAIRN CLO XI: Fitch Assigns B-(EXP) Rating on Class F Debt
----------------------------------------------------------
Fitch Ratings assigned Cairn CLO XI DAC expected ratings.
The assignment of final ratings is contingent on the receipt of
final documents conforming to information already reviewed.
CAIRN CLO XI DAC
Class A; LT AAA(EXP)sf; Expected Rating
Class B; LT AA(EXP)sf; Expected Rating
Class C; LT A(EXP)sf; Expected Rating
Class D; LT BBB-(EXP)sf; Expected Rating
Class E; LT BB-(EXP)sf; Expected Rating
Class F; LT B-(EXP)sf; Expected Rating
Sub.; LT NR(EXP)sf; Expected Rating
TRANSACTION SUMMARY
KEY RATING DRIVERS
'B' Portfolio Credit Quality
Fitch places the average credit quality of obligors in the 'B'
range. The Fitch-weighted average rating factor (WARF) of the
identified portfolio is 32.98, below the indicative covenanted
maximum Fitch WARF of 34.
High Recovery Expectations
At least 90% of the portfolio comprises senior secured obligations.
Fitch views the recovery prospects for these assets as more
favourable than for second-lien, unsecured and mezzanine assets.
The Fitch-weighted average recovery rate (WARR) of the identified
portfolio is 64.64%, above the indicative covenanted minimum Fitch
WARR of 63%.
Limited Interest Rate Exposure
Up to 5% of the portfolio can be invested in fixed-rate assets,
while fixed-rate liabilities represent 0% of the target par. The
transaction features a EUR20 million 2% interest rate cap with a
seven-year maturity. Fitch modelled both 0% and 5% fixed-rate
buckets and found that the rated notes can withstand the
interest-rate mismatch associated with each scenario.
Diversified Asset Portfolio
The covenanted maximum exposure to the top 10 obligors for
assigning the expected ratings is 20% of the portfolio balance. The
transaction also includes limits on maximum industry exposure based
on Fitch's industry definitions. The maximum exposure to the
three-largest (Fitch-defined) industries in the portfolio is
covenanted at 40%. These covenants ensure that the asset portfolio
will not be exposed to excessive concentration.
Portfolio Management
The transaction features 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 and the various structural
features of the transaction, and to assess their effectiveness,
including the structural protection provided by excess spread
diverted through the par value and interest coverage tests.
RATING SENSITIVITIES
A 125% 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 four notches for the rated notes.
CAIRN CLO XI: S&P Assigns Prelim B-(sf) Ratings on Class F Notes
----------------------------------------------------------------
S&P Global Ratings assigned preliminary credit ratings to the class
A to F European cash flow CLO notes issued by Cairn CLO XI DAC. At
closing the issuer will issue unrated subordinated notes.
The preliminary ratings reflect S&P's assessment of:
-- The diversified collateral pool, which consists primarily of
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
-- The transaction's legal structure, which S&P expects to be
bankruptcy remote.
-- The transaction's counterparty risks, which S&P expects to be
in line with its counterparty rating framework.
Under the transaction documents, the rated notes will pay quarterly
interest unless there is a frequency switch event. Following this,
the notes will permanently switch to semiannual payment.
S&P said, "Our preliminary ratings reflect our assessment of the
preliminary collateral portfolio's credit quality, which has a
weighted-average 'B' rating. We consider that the portfolio on the
effective date will be well-diversified, primarily comprising
broadly syndicated speculative-grade senior secured term loans and
senior secured bonds. Therefore, we have conducted our credit and
cash flow analysis by applying our criteria for corporate cash flow
collateralized debt obligations.
"In our cash flow analysis, we used the EUR400 million target par
amount, the covenanted weighted-average spread (3.75%), the
covenanted weighted-average coupon (5.00%), and the covenanted
weighted-average recovery rates for all rating levels. As the
portfolio is being ramped, we have relied on indicative spreads and
recovery rates of the portfolio. The transaction also benefits from
a EUR20 million seven-year interest cap with a strike rate of 2%,
reducing interest rate mismatch between assets and liabilities in a
scenario in which interest rates exceed 2%.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class B to E notes could withstand
stresses commensurate with higher rating levels than those we have
assigned. However, as the CLO will be in its reinvestment phase
starting from closing, during which the transaction's credit risk
profile could deteriorate, we have capped our preliminary ratings
assigned to the notes.
"Under our structured finance ratings above the sovereign criteria,
the transaction's exposure to country risk is sufficiently
mitigated at the assigned preliminary rating levels.
"Elavon Financial Services DAC is the bank account provider and
custodian. At closing, we anticipate that the documented downgrade
remedies will be in line with our current counterparty criteria.
"At closing, we consider that the issuer will be bankruptcy remote,
in accordance with our legal criteria.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe our preliminary ratings
are commensurate with the available credit enhancement for each
class of notes."
Ratings List
Class Prelim. Rating Prelim. amount
(mil. EUR)
A AAA (sf) 244.00
B AA (sf) 40.00
C A (sf) 32.00
D BBB (sf) 23.00
E BB- (sf) 23.00
F B- (sf) 10.00
Sub NR 46.725
NR--Not rated.
CVC CORDATUS XVI: Fitch Assigns B-(EXP) Rating on Class F Debt
--------------------------------------------------------------
Fitch Ratings assigned CVC Cordatus Loan Fund XVI DAC expected
ratings.
The assignment of final ratings is contingent on the receipt of
final documents conforming to information already reviewed.
CVC Cordatus Loan Fund XVI DAC
Class X; LT AAA(EXP)sf; Expected Rating
Class A-1; LT AAA(EXP)sf; Expected Rating
Class A-2; LT AAA(EXP)sf; Expected Rating
Class B; LT AA(EXP)sf; Expected Rating
Class C-1; LT A(EXP)sf; Expected Rating
Class C-2; LT A(EXP)sf; Expected Rating
Class D; LT BBB-(EXP)sf; Expected Rating
Class E; LT BB-(EXP)sf; Expected Rating
Class F; LT B-(EXP)sf; Expected Rating
Class M-1; LT NR(EXP)sf; Expected Rating
Class M-2; LT NR(EXP)sf; Expected Rating
TRANSACTION SUMMARY
CVC Cordatus Loan Fund XVI DAC is a securitisation of mainly senior
secured obligations with a component of senior unsecured, mezzanine
and second-lien loans. A total expected note issuance of EUR413.6
million will be used to fund a portfolio with a target par of
EUR400 million. The portfolio will be managed by CVC Credit
Partners European CLO Management LLP. The CLO envisages a 4.5-year
reinvestment period and an 8.5-year weighted average life (WAL).
KEY RATING DRIVERS
'B' Portfolio Credit Quality
Fitch expects the average credit quality of obligors to be in the
'B' category. The weighted average rating factor of the identified
portfolio is 32.4.
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 (WARR) of the identified portfolio
is 67.0%.
Diversified Asset Portfolio
The transaction will feature different matrices with different
allowances for exposure to both the 10 largest obligors and
fixed-rate assets. The manager will be able to interpolate between
these matrices. The transaction also includes limits on maximum
industry exposure based on Fitch's industry definitions. The
maximum exposure to the three largest (Fitch-defined) industries in
the portfolio is covenanted at 40%. These covenants ensure that the
asset portfolio will not be exposed to excessive concentration.
Limited Interest Rate Exposure
Up to 12.5% of the portfolio can be invested in fixed-rate assets,
while fixed-rate liabilities represent 11.3% of the target par.
Fitch modelled both 0% and 12.5% fixed-rate buckets and found that
the rated notes can withstand the interest rate mismatch associated
with each scenario.
Portfolio Management
The transaction features 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, and the various structural
features of the transaction. It also used the model to assess their
effectiveness, including the structural protection provided by
excess spread diverted through the par value and interest coverage
tests.
RATING SENSITIVITIES
A 125% 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 four notches for the rated notes.
CVC CORDATUS XVI: S&P Assigns Prelim B-(sf) Rating on Cl. F Notes
-----------------------------------------------------------------
S&P Global Ratings assigned preliminary credit ratings to the class
X to F European cash flow CLO notes issued by CVC Cordatus Loan
Fund XVI DAC. At closing the issuer will issue unrated subordinated
notes.
The preliminary ratings reflect S&P's assessment of:
-- The diversified collateral pool, which consists primarily of
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
-- The transaction's legal structure, which S&P expects to be
bankruptcy remote.
-- The transaction's counterparty risks, which S&P expects to be
in line with its counterparty rating framework.
Under the transaction documents, the rated notes will pay quarterly
interest unless there is a frequency switch event. Following this,
the notes will permanently switch to semiannual payment.
S&P said, "Our preliminary ratings reflect our assessment of the
preliminary collateral portfolio's credit quality, which has a
weighted-average 'B' rating. We consider that the portfolio on the
effective date will be well-diversified, primarily comprising
broadly syndicated speculative-grade senior secured term loans and
senior secured bonds. Therefore, we have conducted our credit and
cash flow analysis by applying our criteria for corporate cash flow
collateralized debt obligations.
"In our cash flow analysis, we used the EUR400 million target par
amount, the covenanted weighted-average spread (3.70%), the
weighted-average coupon (4.50%), and the covenanted
weighted-average recovery rate for 'AAA'-rated notes. As the
portfolio is being ramped, we have relied on indicative spreads and
recovery rates of the portfolio. Our credit and cash flow analysis
indicates that the available credit enhancement for the class B to
F notes could withstand stresses commensurate with higher ratings
than those we have assigned. However, as the CLO will be in its
reinvestment phase starting from closing, during which the
transaction's credit risk profile could deteriorate, we have capped
our preliminary ratings assigned to the notes.
"Under our structured finance ratings above the sovereign criteria,
the transaction's exposure to country risk is sufficiently
mitigated at the assigned preliminary rating levels.
Elavon Financial Services DAC is the bank account provider and
custodian. At closing, S&P anticipates that the documented
downgrade remedies will be in line with its current counterparty
criteria.
At closing, S&P considers that the issuer will be bankruptcy
remote, in accordance with its legal criteria.
Following S&P's analysis of the credit, cash flow, counterparty,
operational, and legal risks, it believes its preliminary ratings
are commensurate with the available credit enhancement for each
class of notes.
Ratings List
Class Prelim. Rating Prelim. amount
(mil. EUR)
X AAA (sf) 2.00
A-1 AAA (sf) 219.00
A-2 AAA (sf) 30.00
B AA (sf) 39.80
C-1 A (sf) 13.90
C-2 A (sf) 15.00
D BBB (sf) 22.30
E BB (sf) 22.00
F B- (sf) 9.00
M-1 NR 39.60
M-2 NR 1.00
NR--Not rated.
DEKANIA EUROPE II: Fitch Affirms CC Rating on Class E Debt
----------------------------------------------------------
Fitch Ratings downgraded Dekania Europe CDO II, a collateralised
debt obligation, class D notes to 'CCC' and affirmed the remaining
three classes.
Dekania Europe CDO II Plc
Class B XS0265867985; LT BBBsf Affirmed; previously at BBBsf
Class C XS0265871409; LT BBsf Affirmed; previously at BBsf
Class D1 XS0265875145; LT CCCsf Downgrade; previously at Bsf
Class D2 XS0266479913; LT CCCsf Downgrade; previously at Bsf
Class E XS0265883164; LT CCsf Affirmed; previously at CCsf
TRANSACTION SUMMARY
Dekania Europe CDO II is a cash flow CDO transaction managed by
Dekania Capital Management, LLC, and an affiliate of Cohen Brothers
LLC. The notes are backed primarily by euro-denominated hybrid
capital securities and subordinated bonds issued predominantly by
small and mid-sized European insurance companies and, to a lesser
extent, banks.
KEY RATING DRIVERS
Weakened Credit Quality
The downgrade of the class D notes to 'CCC' reflects primarily a
worsening of the expected default and loss rates for the portfolio
due to the pay-down of an investment-grade asset representing
around 15% of the performing portfolio as of the last review in
November 2018. As a consequence, the credit quality of the
performing portfolio has deteriorated compared with the last
review.
Modest Increase in Credit Enhancement
Dekania Europe CDO II notes have benefitted from a modest increase
in credit enhancement (CE) since the last rating action in November
2018. Available CE on the class B notes is now 85.3%, versus 71.8%
a year ago, based on the performing portfolio. Increases in CE on
the class C and D notes were less substantial and the class E notes
remain under-collateralised. Specifically CE for the class D note
has only marginally increased and a substantial proportion of the
CE for this class is provided by a perpetual asset. None of the
rated notes has accumulated further deferred interest during the
past 12 months.
High Obligor Concentration
The deleveraging of the portfolio was accompanied by an increase in
obligor concentration. The ratings are therefore capped in line
with Fitch CLOs and Corporate CDOs Rating Criteria at 'BBBsf'. The
performing portfolio comprises of eight assets from seven obligors,
down from nine assets and eight obligors at its last review.
Decreased Excess Spread
As the cost of funding increases due to the pay-down of most senior
notes, the average excess spread continues to decrease. Excess
spread is slightly lower compared with last year's review, and only
EUR0.4 million of interest from assets (excluding the perpetual
diverted interest amount) were used to pay down the principal
balance of the notes compared with EUR1.3 million as of the last
review. As the majority of the portfolio matures after 2035, the
transaction will rely on excess spread and interest proceeds to pay
down the notes.
No Defaulted Assets
There are no defaulted assets in the portfolios. However there is
one asset deferring interest.
Long Maturities/Perpetual Asset
Only a third of the performing portfolio matures before 2035, while
54% of the portfolio matures between 2035 and the final maturity of
the transaction in 2037, increasing the sensitivity of the junior
notes to a potential downward rating migration of the underlying
assets. There is one perpetual asset in Dekania II representing
12.5% of the performing portfolio, increasing the tail risk that
may affect junior notes. Perpetual securities are treated as
long-dated assets as described in Fitch "CLOs and Corporate CDOs
Rating Criteria", whereby they are assumed to be sold and receive
the expected recovery value at the maturity of the CDO notes.
RATING SENSITIVITIES
A 125% 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 two notches for the rated notes.
DEKANIA EUROPE III: Fitch Affirms Csf Rating on 2 Tranches
----------------------------------------------------------
Fitch Ratings affirmed Dekania Europe CDO III Plc, a collateralised
debt obligation.
Dekania Europe CDO III Plc
Class B XS0298467159; LT BBsf Affirmed; previously at BBsf
Class C XS0298467407; LT CCCsf Affirmed; previously at CCCsf
Class D XS0298468637; LT CCsf Affirmed; previously at CCsf
Class E XS0298469361; LT Csf Affirmed; previously at Csf
Class F XS0298469874; LT Csf Affirmed; previously at Csf
TRANSACTION SUMMARY
Dekania Europe CDO III is a cash flow CDO transaction managed by
Dekania Capital Management, LLC, an affiliate of Cohen Brothers
LLC. The notes are backed primarily by euro-denominated hybrid
capital securities and subordinated bonds issued predominantly by
small and mid-sized European insurance companies and, to a lesser
extent, banks.
KEY RATING DRIVERS
Increased Credit Enhancement
The notes have benefitted from a modest increase in credit
enhancement (CE) since the last rating action in November 2018, in
particular the now most senior B notes, which have since amortised
by EUR1.3 million. Available CE on the class B notes is now 61%,
versus 57.8% a year ago, based on the performing portfolio.
Increases in CE on the class C and D were less substantial while
the class E and F notes remain under-collateralised. The class D
notes' overcollateralisation test is failing, leading to further
accumulation of deferred interest for the class E notes.
High Obligor Concentration
The deleveraging of the portfolio was accompanied by an increase in
obligor concentration. The ratings are therefore capped in line
with the CLOs and Corporate CDOs Rating Criteria at 'BBBsf'.
Obligor has increased since its last performance review in November
2018. The performing portfolio now comprises eight assets from
eight obligors, down from nine assets.
Decreased Excess Spread
As the cost of funding increases due to the pay-down of most senior
notes, the average excess spread continues to decrease. Excess
spread is slightly lower than last year's.
No Defaulted Assets
There are no defaulted assets in the portfolios. However there is
one asset with deferred interest.
Tail Risk from Perpetual Assets
The high concentration and significant exposure to perpetual
securities in Dekania Europe CDO III contribute to the tail risk
that may affect non-senior notes. Perpetual assets comprise around
76% of the performing portfolio. Perpetual securities are treated
as long-dated assets as described in Fitch "CLOs and Corporate CDOs
Rating Criteria", whereby they are assumed to be sold and receive
the expected recovery value at the maturity of the CDO notes.
RATING SENSITIVITIES
A 125% default multiplier applied to the portfolio's mean default
rate, and with this increase added to all rating default levels,
would not lead to a downgrade for the rated notes. A 25% reduction
in recovery rates would not lead to a downgrade for the rated
notes.
===========
L A T V I A
===========
TRASTA KOMERCBANKA: Wins Review of Banking License Withdrawal
-------------------------------------------------------------
Philip Blenkinsop at Reuters reports that Latvia's Trasta
Komercbanka has succeeded in getting a review of the withdrawal of
its banking license after the European Court of Justice overturned
a lower European Union court's rulings, ordering it to check the
process was done correctly.
The European Central Bank (ECB), which assumed responsibility for
euro area bank supervision in November 2014, withdrew Trasta
Komercbanka's license in March 2016 after it broke rules on
fighting money laundering and terror financing, Reuters recounts.
In a complex set of rulings, the European Court of Justice (ECJ)
ruled on Nov. 5 that action brought by shareholders in Trasta
against the European Central Bank was inadmissible, Reuters
discloses.
The General Court of the European Union, the lower EU court, had
previously ruled in 2017 that the case of the group of shareholders
was admissible, but the ECJ, the EU's upper court, said on Nov. 5
that the lower court had erred in its judgment, Reuters relates.
However, the ECJ reversed the General Court's finding that a
lawyer, Okko Behrends, could no longer bring an action on behalf of
the bank because a liquidator had revoked his power of attorney,
Reuters notes.
The ECJ found that the liquidator had a conflict of interest and
that Mr. Behrends could bring an action on behalf of the bank,
Reuters states.
Mr. Behrends, who represents the bank and the shareholders, told
Reuters on Nov. 6 that the shareholders had achieved their primary
objective in securing legal protection through the bank, as granted
by the ECJ.
===================
L U X E M B O U R G
===================
SUNSHINE LUXEMBOURG VII: Fitch Assigns B IDR, Outlook Stable
------------------------------------------------------------
Fitch Ratings assigned Sunshine Luxembourg VII S.a.r.l, the vehicle
used by EQT to acquire Nestle's Skin Health Division for CHF10.2
billion, a final Long-Term Issuer Default Rating of 'B' with a
Stable Outlook. Fitch has also assigned a final senior secured
rating of 'B+'/'RR3' to senior secured debt instruments issued by
Sunshine Luxembourg VII S.a.r.l.
The assignment of the final instrument ratings is in line with the
expected ratings (assigned in July 2019), given the amendments to
the final version of finance documentation in favour of creditors.
The rating reflects Galderma's diversified portfolio of
prescription drugs and personal care products, mostly characterised
by a medical profile and overall benefiting from good growth
prospects. Such positive factors are contrasted against initially
weak financial credit metrics and some moderate execution risks in
prescription drugs and consumer products. This follows the
successful profitability turnaround delivered by management over
2016-2018.
KEY RATING DRIVERS
Consumer Products Characteristics Prevail: Fitch views Galderma
predominantly as a consumer products company, with its branding and
distribution capability being critical success factors for a large
proportion of its portfolio, as well as its lower R&D risks and
pricing pressure compared with pharma companies. As a mid-sized
personal care and consumer healthcare industry player, Galderma has
good profitability, exposure to strong-growth categories and a
quasi-duopoly reference market for its aesthetics business.
Additionally, the association of its products with
pharmaceutical/medical use supports the pricing power of its
products as well as customer loyalty.
Diversified Sales Channels and Products: The diversified nature of
Galderma's product portfolio, spanning aesthetic treatments mainly
administered by doctors and sold through clinics, consumer products
sold both at retailers and directly to consumers, and prescription
pharmaceutical products sold by pharmacies, means the company is
less vulnerable to customer concentration and pricing pressure than
other consumer goods companies. Moreover, Galderma's good product
diversification is credit-positive, with the strength of its
aesthetics business and of the Cetaphil brand mitigating weaknesses
and execution risks in other segments. The business also benefits
from moderate geographic diversification beyond the US, which
accounts for 50% of its sales, in the EU and some emerging markets,
namely Brazil, China and the Gulf countries.
Stable Underlying Cash Flow: Fitch projects that free cash flow
(FCF) in 2020 - the first year post-carve out - will be negative by
approximately CHF75 million, due to one-off P&L costs and capex
necessary to build a self-standing organisation from Nestle. The
expected revenue decline in the prescription division in 2022 due
to the loss of exclusivity should also lead to a large working
capital outflow in that year. Excluding these one-off events, Fitch
expects the company to generate sustainable annual FCF of around
CHF70 million-CHF80 million, due to a healthy EBITDA margin and
modest capex. FCF has scope to significantly increase in 2023 if
the prescription business pipeline is successful.
High Leverage: The senior secured debt issue will lead to funds
from operations (FFO)-to- adjusted gross debt of approximately
10.5x in 2020. This leverage is not consistent with the rating but
Fitch assumes that success of management's strategy, coupled with
FCF generation, should enable Galderma to reduce it to or below
8.5x by 2022. This corresponds to net debt-to-EBITDA of
approximately 7.0x, which is higher than management's maximum
target leverage. FFO fixed charge cover is also weak for the rating
at approximately 1.5x-2.0x over 2020-2022.
Moderate Execution Risks: Sales at Galderma's acne treatment
subscription-based Pro-activ business have been in continued
decline over the past decade and the unit was loss-making in 2018.
While a new marketing strategy was launched earlier in 2019, Fitch
expects challenges in returning this business to sustainable
growth. Therefore, Fitch conservatively does not assume profit
contribution from this business, which accounts for approximately
10% of consolidated group sales.
Additionally, the company's prescription business should see a
contraction of revenues by approximately CHF100 million-CHF150
million in 2022 when one of its products will go off patent. At the
same time the company's more promising prescription pipeline
products have yet to pass the Stage III phase, and which are
targeted to contribute to revenues only from 2023. Finally, Fitch
assumes additional marketing spending on the promising global
roll-out and brand extension strategy for the Cetaphil skincare
brand.
Successful Turnaround Efforts: Management delivered a successful
turnaround in profitability between 2016 and 2018, including the
restructuring of the R&D function and factory closures, leading to
a reduction of the cost base by CHF160 million. The company's
EBITDA margin reached a good level of 19.1% (Fitch-adjusted
calculation) in 2018 compared with around 15% in 2016. These levels
are aligned with other fast-moving consumer goods companies, albeit
lower than that of industry leading players in personal care due to
comparatively lower scale and the dilutive effect of loss-making
Pro-Activ.
DERIVATION SUMMARY
Fitch rates Galderma according to its global rating navigator
framework for consumer companies. Under this framework, which
recognises that its operations are driven by marketing investments,
a well-established and diversified distribution network and
moderate importance of R&D-led innovation capability, the
prescription business benefits the consolidated business profile by
offering diversification by product and geography, with good
exposure to mature markets.
Compared with global industry participants, such as Johnson &
Johnson and Unilever NV/PLC (A/Stable), Galderma's business risk
profile is influenced by the company's smaller scale and
diversification. This is also the case when benchmarking Galderma
against its most relevant pharma peer, Allergan plc (BBB-/RWP).
Nevertheless, high financial leverage is the key constraint on the
rating, compared with international global peers across both
consumer and pharma sectors.
Relative to personal care peer Avon Products (B+/RWP), Galderma has
lower revenues, notably lower EBITDA margins as well as
significantly higher leverage but a more robust business model.
Other comparable peers in the broad food and consumer sectors
include 'B+' rated International Design Group and Sigma HoldCo,
both displaying lower leverage and better FFO fixed charge cover
while Sigma HoldCo enjoys stronger FCF generation capability.
Compared with pharma company Nidda Bondco GmbH (Stada (B/Stable) a
producer of generic pharmaceuticals with comparable, current levels
of leverage (around 10x), Fitch views Stada's business model as
being anchored in the 'BB' category, offsetting aggressive levels
of leverage. Additionally, Stada has deleveraging potential through
organic means with its FCF margin forecasted to trend above 5% over
the next four years. Fitch considers both Galderma and Stada as 'B'
ratings due to their elevated leverage but see scope for a
strengthening of their credit profiles.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
- Mid-single digit annual revenue growth (5.5%) from existing and
pipeline products;
- Fitch-adjusted EBITDA margin gradually improving towards around
21% in 2021 (17.3% expected in 2019);
- Predominantly neutral working capital cash flows with the
exception of 2021 when Fitch assumes a significant cash outflow of
CHF114 million (consistent with management's envisaged loss of
revenue in the prescriptions business);
- Capex of around 4% of revenues;
- Revolving credit facility (RCF) to be drawn by a maximum of
CHF100 million at any point in time, with the facility fully drawn
by end-2023;
- No dividends expected to be paid;
- PIK notes (CHF250 million) treated as equity
Key Recovery Assumptions
- The recovery analysis assumes that Galderma would be
restructured as a going concern rather than liquidated in an event
of default
- Galderma's post-reorganisation, going-concern EBITDA reflects
Fitch's view of a sustainable EBITDA that is 15% below the 2019
Fitch-forecasted EBITDA of CHF517 million. In this scenario, the
stress on EBITDA would most likely result from operational issues
perpetuated by lower growth and weaker margin expansion than
currently envisaged in the aesthetics and consumer divisions
- Fitch applies a distressed enterprise value (EV)/EBITDA
multiple of 6.0x to calculate a going-concern EV reflecting
Galderma's large scale and business diversity. This is below 7.0x
used for Stada, given Galderma's operating challenges in two of the
company's business segments, and Stada's high margin business
Based on the payment waterfall the RCF of CHF500 million ranks
pari-passu with the senior secured term loans (US dollar and euro
term loans B for CHF2,470 million and CHF1,075 million equivalent,
respectively). Therefore, after deducting 10% for administrative
claims, its waterfall analysis generates a ranked recovery for the
senior secured loans in the 'RR3' band, indicating a 'B+'
instrument rating, one notch above the IDR.
RATING SENSITIVITIES
A positive rating action is not envisaged over the next three years
given the significant financial risks post-carve out constraining
the IDR at 'B'. However over time positive rating action could be
considered based on:
- Delivery of management business plan with each of the
aesthetics and consumer portfolios delivering continued EBITDA
growth over 2020-2022 and the expected dip in prescriptions margin
being limited to 2022;
- FFO adjusted gross leverage trending towards 7.0x; and
- FFO fixed charge cover above 2.0x.
Future Developments That May, Individually or Collectively, Lead to
Negative Rating Action
- Failure to deleverage below 8.5x on FFO-adjusted gross basis by
2022;
- FFO fixed charge cover weakening below 1.5x for two consecutive
years;
- Adjusted consolidated EBITDA margin failing to reach 19.5% by
2022; and
- FCF margin sustainably below 2% beyond 2021, (excluding the
envisaged one-off working capital adjustment in 2022).
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: The committed RCF of CHF500 million and
estimated cash at the closing of the acquisition offset any
short-term liquidity challenges from an expected negative FCF
margin in 2020. Liquidity is also set to improve up to 2023 once
the material one-off cash outflows have ceased. Galderma benefits
from a long-term debt maturity profile with no meaningful debt
redemptions before 2025.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of 3. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or to the way in which they are being
managed by the entity.
=====================
N E T H E R L A N D S
=====================
E-MAC DE 2006-I: Fitch Affirms CCsf Rating on Class E Debt
----------------------------------------------------------
Fitch Ratings taken multiple rating actions on the E-MAC DE RMBS
series by upgrading four tranches, downgrading one tranche and
removing six tranches from rating watch.
RATING ACTIONS
E-MAC DE 2006-I B.V
Class A XS0257589860; LT AAAsf Affirmed; previously at AAAsf
Class B XS0257590876; LT Asf Upgrade; previously at BBB+sf
Class C XS0257591338; LT CCCsf Affirmed; previously at CCCsf
Class D XS0257592062; LT CCsf Affirmed; previously at CCsf
Class E XS0257592575; LT CCsf Affirmed; previously at CCsf
E-MAC DE 2005-I B.V.
Class B XS0221901050; LT A+sf Affirmed; previously at A+sf
Class C XS0221902538; LT BBsf Downgrade; previously at BBBsf
Class D XS0221903429; LT CCCsf Affirmed; previously at CCCsf
Class E XS0221904237; LT CCsf Affirmed; previously at CCsf
E-MAC DE 2006-II B.V.
Class A2 XS0276933347; LT AAAsf Upgrade; previously at AAsf
Class B XS0276933859; LT AA+sf Upgrade; previously at BBB+sf
Class C XS0276934667; LT BB-sf Upgrade; previously at B+sf
Class D XS0276935045; LT CCsf Affirmed; previously at CCsf
Class E XS0276936019; LT CCsf Affirmed; previously at CCsf
TRANSACTION SUMMARY
The transactions are true-sale securitisations of German
residential mortgage loans originated by GMAC-RFC Bank GmbH. Adaxio
AMC GmbH is the transaction's current servicer and the successor to
GMAC-RFC Bank GmbH.
KEY RATING DRIVERS
Swaps Can Support Transactions
Loans are mainly fixed-rate with only a small portion of
floating-rate loans in the pools. The fixed-rate portion of the
portfolio is swapped with a fixed swap rate to be paid by the SPV
in exchange for 3m Euribor. Payments on both legs are made on the
asset balance including delinquent loans. Loans are excluded from
the balance after property sale.
On the loan reset dates the issuer will renew the swap agreement in
respect of all loans that are resetting on that date. The new swap
rate ensures, on the relevant day only, a minimum excess margin of
20bp after fees and expenses to be paid at the top of the interest
priority of payments and note interest.
Fitch has reflected this feature in its analysis allowing the swap
cost to adjust to provide coverage for senior payments and note
interest and 20bp excess spread. Fitch assumed the share of fixed-
and floating-rate loans to remain constant. This is deemed to be a
reasonable assumption given the stable share since the time when
most loans reached their first reset date.
Unsecured Recoveries Cover High Costs
The transactions feature separate waterfalls with no principal
borrowing to cover fees and expenses or note interest. The
available interest funds contain a significant amount of unsecured
recoveries. These recoveries help to cover the high fees and
expenses in the interest waterfall. While the swap will provide
some support to cover rising (in relative terms) transactions costs
Fitch is limiting this effect by assuming a minimum swap rate of
-1%. This means excess spread can fall below its guaranteed level
in its analysis. This addresses risk of excessive dependence on the
swap counterparties.
Fitch assumed fees of EUR300,000 plus 0.5% of the collateral
balance annually, well above the typical fees in RMBS. These fees
are lower than the actual fees in more recent payment periods. In
return Fitch does not consider unsecured recoveries as available
interest funds in its modelling.
The further development of senior fees and expenses relative to
available interest funds and most importantly unsecured recoveries
is crucial for the repayment of notes. At some point the
transactions may need to rely on the liquidity facility to cover
costs and interest. If these are depleted before the notes are
repaid, interest may remain unpaid at the maturity date of the
notes. E-MAC DE 2005-I class C notes are particularly vulnerable to
increased costs or reduced income and have therefore been
downgraded to 'BBsf'.
Increased Credit Enhancement
The transactions are amortising sequentially and Fitch does not
expect a switch to pro-rata given the severe trigger breaches with
regard to the principal deficiency ledger (PDL), arrears and
reserve fund. Relative credit enhancement for senior and mezzanine
notes has been further increasing since the review in 2018. The
upgrades of such notes are driven by this improved protection.
Principal losses for the class B and C (2005-I); A and B (2006-I);
and A2 and B (2006-II) notes are becoming less of a risk. Instead
ratings are dominated more by risks to the coverage of expenses and
note interest as outlined.
Junior Notes Under-collateralised
As a result of large losses to date, the class D and E notes of
2005-I; C, D, and E notes of 2006-I; and D and E notes of 2006-II
are no longer fully backed by performing assets. Ratings were
affirmed at 'CCCsf' and below to reflect the high likelihood of
principal losses. Recovery estimates were removed as these figures
are highly volatile based on the assumptions made.
Updated Criteria and Criteria Variation
Fitch has amended certain foreclosure frequency (FF) and recovery
rate (RR) assumptions for Germany in July 2019.
On the FF side, changes compared with the previous criteria
assumptions are mainly driven by the removal of the FF adjustment
factor for a portfolio's remaining term to maturity. This is
because Fitch considers its FF adjustment factor for loans with
original terms exceeding 30.5 years a closer proxy for higher-risk
characteristics of long-dated contracts.
On the RR side, the main change is giving 100% credit to increasing
property prices in the indexation of property values, compared with
a 50% consideration previously. Applying 100% credit to upward
house price indexation is consistent with Fitch's approach for
updating current-to-trough house price declines (HPD).
The class B notes of E-MAC DE 2006-I and class C notes of E-MAC DE
2006-II were placed on RWP, while the class B notes of E-MAC DE
2006-II were maintained on RWP in July 2019 following the update of
the criteria. Asset losses were calculated under the new criteria
including a variation as outlined. Fitch has thus removed the notes
from RWP.
As a variation from criteria Fitch applies haircuts of 50% for each
property value. This variation aligns the calculated weighted
average recovery rates with recoveries observed.
Weak Asset Performance
The 90+day arrears for E-MAC DE 2005-I, 2006-I and 2006-II were at
11.8%, 16.3% and 15.3% as of August 2019, respectively while
realised losses accumulated to 9.4%, 11.8% and 9.9% of the closing
balance including prefunding.
To reflect weaker origination practises of GMAC RFC, which were not
in line with a typical German mortgage originator, Fitch has
applied a 2x originator adjustment to the transactions resulting in
higher assumed FFs. In addition, all property values were reduced
by 50% to reduce calculated RRs as outlined.
Account Bank Replacement Completed
ABN Amro replaced Deutsche Bank as issuer account bank and the
accounts were transferred in June 2019. This is a delayed
consequence of the downgrade of Deutsche Bank in September 2017.
The bank remains collection account bank, prospectively only
holding accounts to collect payments from borrowers. Fitch has
reviewed the documentation for the transfer of issuer accounts and
deems the transaction to be able to support ratings higher than the
counterparties on this basis.
The replacement of the account bank leads to the resolution of
rating watches for the class A notes of E-MAC DE 2006-I and E-MAC
DE 2006-II and the class B notes of E-MAC DE 2005-I and E-MAC DE
2006-II. These notes were placed on rating watch in December 2017
and November 2018.
Liquidity Facility Provider Replacement Initiated
Fitch was informed that for the E-MAC DE 2005-I and E-MAC DE 2006-I
transactions Deutsche Bank has not renewed the liquidity provider
role. As a result of the downgrade of Deutsche Bank,
standby-drawings have already been made in the past, which means
the action has no immediate impact on the transactions. The search
for a new provider has been initiated.
RATING SENSITIVITIES
Repayment of senior and mezzanine notes is highly sensitive to the
transaction's income versus costs. Higher-than-anticipated fees and
expenses, lower income from the asset portfolio or higher swap
costs could result in a downgrade of the notes. This affects
primarily the class B and C (2005-I); A and B (2006-I); and A2 and
B (2006-II) notes.
The ratings of junior notes rated 'CCCsf' and lower are sensitive
to higher property values realised from foreclosures or increasing
excess spread. This would limit further PDL entries and could
reduce the existing balances.
CRITERIA VARIATION
As a variation from criteria Fitch applies haircuts of 50% for each
property value. This variation aligns the calculated weighted
average recovery rates with recoveries observed.
The application of the variation resulted in ratings being up to
five (EMAC DE 2005-I and EMAC DE 2006-I) and up to 11 notches (EMAC
DE 2006-II) lower than the model-implied rating using criteria
assumptions.
===========
N O R W A Y
===========
NORWEGIAN AIR: Taps Investors for Second Time to Secure Future
--------------------------------------------------------------
Richard Milne at The Financial Times reports that Norwegian Air
Shuttle is tapping investors for extra cash for the second time
this year as the low-cost airline seeks to secure its financial
future ahead of the tricky winter season.
According to the FT, Europe's third-largest low-cost airline is
issuing up to 27.25 million new shares -- about a fifth of its
existing share capital -- in a private placement as well as a
convertible bond of up to US$175 million.
Norwegian, the FT says, is likely to sell the shares at a discount
to its current share price -- at the Nov. 5 closing level, the new
shares would be worth about NOK1.25 billion (US$135 million). In
its previous NOK3 billion private placement last spring, it sold
them at less than half of its previous price, the FT notes.
It added that it intended to offer an unspecified number of shares
to existing shareholders on the same terms as the private placement
afterwards, the FT discloses.
According to the FT, Geir Karlsen, the acting chief executive, said
that despite "good results to date", its liquidity had been
negatively affected by problems with its Boeing 787 Dreamliner and
737 Max aircraft as well as issues with credit card companies.
"The actions we are now taking are necessary to create financial
headroom to make sure that we have sufficient liquidity as we enter
the next chapter of Norwegian," the FT quotes Mr. Karlsen as
saying. Norwegian added that it would be fully funded "through
2020" after the private placement and convertible bond.
===============
S L O V E N I A
===============
TELEKOM SLOVENIJE: S&P Withdraws 'BB+' LT Issuer Credit Rating
--------------------------------------------------------------
S&P Global Ratings withdrew its 'BB+' long-term issuer credit
ratings on Slovenian telecom operator Telekom Slovenije, d.d. at
the company's request. At the time of the withdrawal, the outlook
on the long-term rating was negative. S&P did not rate any of the
company's debt instruments.
At the time of withdrawal, the negative outlook reflected S&P views
that the company's high capital expenditure and potential pressure
on EBITDA from the intensely competitive domestic market could lead
to a deterioration of credit metrics.
=========
S P A I N
=========
CAIXABANK CONSUMO 4: Moody's Affirms B1 Rating on Class B Notes
---------------------------------------------------------------
Moody's Investors Service upgraded the rating of Class A Notes in
Caixabank Consumo 4, Fondo De Titulizacion. The rating action
reflects the increased levels of credit enhancement for the
affected Notes and better than expected collateral performance.
Moody's affirmed the rating of Class B Notes that had sufficient
credit enhancement to maintain their current rating.
EUR1564 million Class A Notes, Upgraded to Aa1 (sf); previously on
May 30, 2018 Definitive Rating Assigned Aa3 (sf)
EUR136 million Class B Notes, Affirmed B1 (sf); previously on May
30, 2018 Definitive Rating Assigned B1 (sf)
Maximum achievable rating is Aa1 (sf) for structured finance
transactions in Spain, driven by local currency country ceiling
(Aa1) of the country.
Caixabank Consumo 4, Fondo De Titulizacion is a static cash
securitisation of unsecured consumer loans extended to obligors in
Spain by CaixaBank, S.A.
RATINGS RATIONALE
The rating action is prompted by an increase in credit enhancement
for the affected tranches as well as a decreased key collateral
assumption, namely the portfolio default probability assumption,
due to better than expected collateral performance.
Increase in Available Credit Enhancement
Sequential amortization led to the increase in the credit
enhancement available in this transaction. Credit enhancement for
Class A increased to 18.9% from 12.0% at closing.
Revision of Key Collateral Assumptions
As part of the rating action, Moody's reassessed its default
probability and recovery rate assumptions for the portfolio
reflecting the collateral performance to date.
The collateral performance has been better than expected since
closing. Total delinquencies have increased in the past year, with
90 days plus arrears standing at 2.95% of current pool balance.
However, with the pool factor of 55.5%, the cumulative defaults
amounted to only 1.47% of the original pool balance as of the
latest payment date in October 2019.
The current default probability assumption is 6.5% of the current
portfolio balance, corresponding to a mean default assumption of
5.1% of the original pool balance, compared to 6.5% at closing.
Moody's left the assumptions of the recovery rate and portfolio
credit enhancement unchanged at 15.0% and 18.5% respectively.
The principal methodology used in these ratings was "Moody's
Approach to Rating Consumer Loan-Backed ABS" published in March
2019.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include: (1) performance of the underlying collateral that
is better than Moody's expected; (2) an increase in available
credit enhancement; (3) improvements in the credit quality of the
transaction counterparties; and (4) a decrease in sovereign risk.
Factors or circumstances that could lead to a downgrade of the
ratings include: (1) an increase in sovereign risk; (2) performance
of the underlying collateral that is worse than Moody's expected;
(3) deterioration in the Notes' available credit enhancement; and
(4) deterioration in the credit quality of the transaction
counterparties.
ENCE ENERGIA: Moody's Affirms Ba2 CFR & Alters Outlook to Neg.
--------------------------------------------------------------
Moody's Investors Service affirmed the Ba2 corporate family rating
and its Ba2-PD probability of default rating of ENCE Energia y
Celulosa, S.A. Concurrently, Moody's changed ENCE's outlook to
negative from stable.
"T[he] change in outlook to negative reflects the deterioration in
pulp prices at a time where debt levels are high following recent
sizable investment activity. This raises questions marks as to
ENCEs ability to achieve and sustain credit metrics commensurate
with a Ba2 rating over the next year", says Dirk Steinicke, Moody's
lead analyst for ENCE.
RATINGS RATIONALE
Credit metrics such as ENCEs debt/EBITDA at 5.1x and retained cash
flow/net debt of 9.6% are weak at this point in time with some
uncertainty as to when they will recover back to metrics more
commensurate with a Ba2 level. While incremental EBITDA will be
generated from two renewable energy plants coming on stream during
Q1 2020, together with a 10% increase in its pulp capacity and
unfavorable hedges rolling off, Moody's expects pulp prices to
remain weak over at least H1 next year. While there is some
indication that pulp prices are bottoming out, Moody's does not see
a catalyst for a significant rebound. Beyond the current weakness
in credit metrics, ENCE will delay additional planned investments
in both its pulp and energy business. Over the last 18 months ENCE
has conservatively grown its regulated renewable energy business in
Spain, which is generally more stable than the pulp business. With
a current installed capacity of 220 MW the company has already
become the leading biomass player in the country. The EBITDA
contribution from the energy business has grown to more than EUR50
million in 2019 from less than EUR20 million in 2013, now already
covering a good portion of the fixed costs of the pulp business.
The rating agency expects that the importance of the energy
business will continue to grow with the 46MW biomass power plants
in Huelva and 50MW biomass power plant in Ciudad Real which should
improve renewable energy EBITDA to more than EUR80 million in 2020.
Despite the significant investments, the company is likely to
remain below its net leverage target of 4.5x net debt / EBITDA in
its renewable energy business (4.3x per September 2019).
In addition, ENCE's previously announced new 2023 strategic plan
investments are likely being delayed until credit metrics are more
comfortably within the target range and higher pulp prices would
allow for the meaningful investments. As per September ENCE's net
leverage in its pulp business was 1.8x net debt / EBITDA, with long
term financing, no maintenance covenants and ample liquidity.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Further upgrade would primarily require ENCE further diversifying
its business profile beyond pulp. It would also require: (1) its
Moody's adjusted EBITDA margin maintained in high twenties in %
terms through the cycle; (2) consistent positive free cash flow
through the cycle; (3) its consolidated Moody's adjusted
debt/EBITDA maintained below 2.0x through the cycle; and (4) its
consolidated Moody's adjusted RCF/debt maintained above 30% through
the cycle.
Moody's could downgrade ENCE, if its: (1) free cash flow generation
remains consistently negative; (2) Moody's adjusted debt/EBITDA
moves sustainably above 3.0x; (3) Moody's adjusted RCF/debt trends
sustainably below 20%; (4) liquidity sustainably deteriorates.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Paper and
Forest Products Industry published in October 2018.
COMPANY PROFILE
Headquartered in Madrid, Spain, ENCE Energia y Celulosa, S.A. is a
leading European producer of bleached hardwood kraft pulp from
eucalyptus, with growing renewable energy operations in Spain. In
its pulp business, following the closure of its Huelva pulp mill in
2014, ENCE has a production capacity of about 1.1 million tonnes
per annum of eucalyptus pulp from its two remaining Spanish mills,
Navia and Pontevedra, as well as biomass cogeneration (lignin)
operations that allow the business to be broadly energy
self-sufficient. In its energy business, the group currently
operates seven independent energy generation facilities, mostly in
southern Spain, with a total installed capacity of around 220
megawatts (MW). In the 12 months ended September 2019, ENCE
reported sales of around EUR800 million. The company is publicly
listed on the Madrid Stock Exchange, with a free float of around
54% and a market capitalisation of around EUR0.9 billion as of
October 31, 2019.
===========
S W E D E N
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HEIMSTADEN BOSTAD: S&P Rates New Unsecured Subordinated Notes 'BB'
------------------------------------------------------------------
S&P Global Ratings assigned its 'BB' issue rating to the proposed
unsecured subordinated hybrid notes to be issued by Heimstaden
Bostad AB (Heimstaden).
S&P understands that the company aims to issue the subordinated
notes in several tranches, in euros and in Swedish krone.
The completion and size of the transaction will be subject to
market conditions, but S&P anticipates it will be at least
benchmark size. Heimstaden plans to use the proceeds to repay
secured debt and to fund the company's expansion in the next few
months.
S&P said, "We classify the proposed notes as having intermediate
equity content until their first call dates (at least five years
for each tranche) because they meet our criteria in terms of their
subordination, permanence, and optional deferability during this
period.
"Consequently, in our calculation of Heimstaden's credit ratios, we
will treat 50% of the principal outstanding under the hybrids as
debt rather than equity. We will also treat 50% of the related
payments on these notes as equivalent to interest expense. Both
treatments are in line with our hybrid capital criteria.
"We arrive at our 'BB' issue rating on the proposed notes by
deducting two notches from our 'BBB-' issuer credit rating on
Heimstaden." Under S&P's methodology:
-- S&P deducts one notch for the subordination of the proposed
notes, because the issuer credit rating on Heimstaden is investment
grade (that is, 'BBB-' or above); and
-- S&P deducts an additional notch for payment flexibility to
reflect that the deferral of interest is optional.
S&P said, "The notching reflects our view that there is a
relatively low likelihood that the issuer will defer interest.
Should our view change, we may increase the number of notches we
deduct to derive the issue rating."
POLYGON AB: Fitch Raises LT IDR to B+, Outlook Stable
-----------------------------------------------------
Fitch Ratings upgraded Swedish property damage restoration operator
Polygon AB´s Long-Term Issuer Default Rating to 'B+' and the
group's EUR250 million senior secured notes to
'BB-'/'RR3'/(51-70%). The Outlook on the IDR is Stable.
The upgrade reflects Polygon´s track record of strong operational
performance, continued increasing scale driven by both solid
organic growth and acquisitions, as well as a sound financial
profile supported by long-term customer relations with high
retention rates. It also reflects better visibility of inorganic
growth after seven completed acquisitions in 9M19.
Although the recently announced increase of the EUR210 million
senior secured notes by EUR40 million will result in higher
leverage at end-2019, its assumptions from 2020 include increasing
funds from operations and neutral-to-positive free cash flow
generation after acquisitions, which will support steady
deleveraging over the next four years.
KEY RATING DRIVERS
Solid Operational Performance: Fitch expects Polygon to continue to
show increasing scale and strong profitability, driven by the
combination of organic growth, bolt-on acquisitions and gradually
improving operating performance. Fitch expects mid-single digit
organic growth, supported by an increasing number of restorable
residential and commercial properties, the ageing of building stock
and the increasing value of properties, which in turn results in
more claims for damages. Fitch forecasts gradual modest improvement
in operating profitability on the back of cost control and
economies of scale.
Adequate Leverage Profile: Fitch deems Polygon's financial
structure as being commensurate with a high 'B' category business
services company. Fitch expects funds from operations
(FFO)-adjusted gross leverage to reach 5.0x in 2020 and modest
deleveraging in 2021-2022 on the back of increasing FFO. Its rating
case includes the planned EUR40 million tap issue to the existing
EUR210 million senior secured notes.
Leading Player in Niche Market: Polygon is the dominant participant
in the European PDR market, with an estimated market share of about
10%, twice as high as its closest competitor's, despite its modest
scale with expected revenue of around EUR680 million in 2019.
Polygon estimates the European PDR market at approximately EUR5.2
billion, as the sector is highly fragmented consisting of many
smaller and often family-owned businesses. In the PDR market, size
is an important competitive advantage as smaller companies do not
usually get framework agreements with large insurance companies.
Additionally, larger participants provide a comprehensive offer
with add-on services, which is an increasingly common requirement
from insurance companies.
Sound Business Profile: Fitch views Polygon's business profile as
solid with market-leading positions and a contracted income
structure that is consistent with a 'BB' rating. It has operations
in 14 countries, providing healthy geographic diversification,
albeit with some dependence on the German market. Its service
offering is well-diversified, which should attract larger insurance
company customers as the group enters new markets. Fitch views
Polygon's dependence on insurance companies as a concentration
risk, generating close to two thirds of the group's revenue,
although the relationships are generally stable and long-term based
on multi-year contracts with a very high retention rate.
Industry with Low Cyclicality: Demand for property damage control
is viewed as stable and driven by insurance claims, which are
resilient to economic trends. More than 90% of Polygon's revenue is
generated from framework agreements with customers and can be
regarded as recurring, delivering good revenue visibility. Claims
under these types of damages follow normal seasonal patterns, with
water leaks and fires being the most important product segments for
Polygon. The remaining revenue is more unpredictable and related to
extreme weather conditions, which have increased during the last
decade.
Fragmented Market Enabling Growth: Polygon has been highly
acquisitive in the last two years and has performed seven
acquisitions in 9M19, resulting in inorganic growth of 6.7%. The
group is advancing towards its goal of being among the top two
players in each country of operation and currently has a leading
PDR market share in a few markets including Germany, the UK and
Norway. Fitch believes that Polygon will continue to gain market
share in selected geographies as it has broadened its services
scope with some of the latest acquisitions.
Above-Average Recovery: Fitch expects above-average recoveries for
Polygon's senior secured debt, driven by the group's strong
operating profitability. Its recovery is based on an estimated
post-distress EBITDA of around EUR41 million as a minimum required
for Polygon to continue operating as a going concern. Fitch also
applys a 5.0x distress enterprise value /EBITDA multiple and deduct
a 10% administrative charge. These assumptions result in a recovery
rate for the senior unsecured rating within the 'RR3' range to
generate a one-notch uplift to the debt rating from the IDR. The
waterfall analysis output percentage on current metrics and
assumptions was 58%.
DERIVATION SUMMARY
Polygon is the market leader in the European PDR market. Its
business model is supported by a wide geographical reach and strong
reputation among clients, similar to other Fitch-rated small-sized
companies active in niche markets, such as L'isolante K-Flex S.p.A.
(B+/Stable). Polygon's framework agreements with major property
insurance providers and leading market positions in Germany, the UK
and the Nordics provide some barriers to entry and enhance
operating leverage. Operating margins are structurally lower than
L'isolante K-Flex's, albeit in line with those of the PDR industry
and the group has stronger cash conversion. Fitch deems Polygon's
leverage profile and FCF generation as being consistent with a high
'B' category rating and better than that of lower-rated companies
such as Praesidiad Group Ltd (B-/Stable) and Officine Maccaferri
S.p.A. (B-/Negative).
KEY ASSUMPTIONS
- Organic revenue growth of around 5% p.a. over the next four
years
- Total acquisition spend of around EUR32 million in 2019 and
EUR46 million in 2020-2022, which includes EUR27 million of
earn-outs (of which around EUR17 million relates to existing
earn-outs from completed acquisitions)
- Total acquired revenue of around EUR70 million by end-2022
- Gradual improvement in EBITDA margin to around 9.3% in 2022
from around 8.7% in 2019, mainly driven by cost control and
synergies from acquisitions
- Stable capex at 3% of revenue over the next four years
- No dividends in 2019-2022
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Positive Rating Action
- Increasing scale with EBIT margin sustainably above 6% (2018:
5.3%)
- Positive FCF post-acquisitions
- FFO adjusted gross leverage sustainably below 4.0x (2018: 5.3x)
and FFO fixed charge cover above 2.5x (2018: 2.0x)
Developments That May, Individually or Collectively, Lead to
Negative Rating Action
- Lack of overall revenue expansion and pressure on margins
- Problems with integration of acquisitions or increased debt
funding
- Lack of consistent positive FCF generation
- FFO adjusted gross leverage sustainably above 5.5x and FFO
fixed charge cover below 2.0x
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: As of September 30, 2019, Polygon had around
EUR46 million of available liquidity, including EUR12 million
readily available cash and a EUR34 million undrawn revolving credit
facility. There are no debt maturities until 2023 and Fitch expects
neutral or positive FCF after acquisitions in 2020-2022.
Debt Structure: Polygon's debt comprises EUR210 million senior
secured notes maturing in 2023 and an additional tap issue of EUR40
million senior secured notes, issued in November 2019, with
maturity in 2023. The net proceeds will be used for acquisitions
and general corporate purposes. The group also has a EUR40 million
super senior revolving credit facility with maturity in 2023.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of 3. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity,
either due to their nature or to the way in which they are being
managed by the entity.
POLYGON AB: Moody's Affirms B1 CFR, Outlook Stable
--------------------------------------------------
Moody's Investors Service affirmed the B1 corporate family rating
and B1-PD probability of default rating of Polygon AB, a provider
of property restoration services for water and fire damages in
Europe. Moody's also affirmed the B1 rating on the senior secured
notes due 2023 and issued by Polygon AB. This includes the assigned
B1 rating to the new EUR40 million add-on to the existing notes.
The outlook on all ratings is stable.
Net proceeds from the additional notes will be used for future
acquisitions as well as general corporate purposes.
The transaction positions Polygon more weakly in the B1 rating
category, based on a more aggressive financial policy as a
consequence of its external growth strategy, a higher leverage and
weaker liquidity profile. The rating affirmation reflects Moody's
expectation of a robust operating performance of the company,
despite a more challenging macroeconomic environment, as Polygon's
business model has a relatively low cyclicality.
RATINGS RATIONALE
The B1 CFR with a stable outlook reflects the higher pro-forma
Moody's-adjusted leverage of 4.4x at closing, which is currently at
the lower end of the expectations for the B1 rating category.
However Moody's expects leverage to reduce towards 4.0x in the next
12-18 months, driven by moderate organic growth, EBITDA-accretive
acquisitions and slight margin improvement.
The operating performance remained stable in the first nine months
of 2019. The company reported revenue growth of 8.2%, driven by
1.5% organic growth and 6.7% from acquisitions. Organic growth
benefits from the favourable property damage restoration market
(PDR) which is supported by stable demands from insurance claims.
The company also maintained its margins supported by its flexible
cost base, increased focus on productivity gains and cost control.
The company will continue playing an active role in the
consolidation of the fragmented PDR market. It completed a number
of acquisitions since the beginning of the year, the largest ones
being Alvisa 24 in March 2019, a fire damage restoration provider
in Switzerland, and Plastic Surgeon in May 2019, a surface repair
and restoration specialist in the UK. These among others expand
Polygon's geographical footprint and extend its offering
capabilities, which also provides future opportunities of growth.
However the company's growth strategy through acquisitions also
bears integration and execution risks.
The B1 CFR rating also takes into account the company's (i) leading
market position in the fragmented European PDR market; (ii) the
broad service offering, advanced technical capabilities and
operational flexibility, which gives the group a competitive edge
in comparison to more local players; and (iii) its long-standing
customer relationships supported by a high share of sales under
framework agreements.
The rating also incorporates the challenges due to the company's
(i) large exposure to Germany which represents about 54% of the
company's sales in 2018; (ii) pricing pressure from the competitive
PDR market and ongoing wage inflation; (iii) approximately 5% of
revenues generated from extreme weather events resulting in some
demand volatility; (iv) and a growth-oriented business strategy,
implying the increased risks of debt-funded acquisitions which
could reduce the deleveraging pace.
LIQUIDITY
Polygon's liquidity profile is adequate, supported by a cash
balance of around EUR46 million post-transaction and EUR40 million
super senior secured revolving credit facility (RCF) expected to
remain undrawn, although EUR4 million is reserved for performance
guarantees. Moody's expects Polygon to continue to generate
positive free cash flows in the next 12-18 months. There are
meaningful intra year working capital swings with typical build up
in the first six months of the year and a release in the second
half, all expected to be backed by internal liquidity sources.
ESG CONSIDERATIONS
Governance risks mainly relate to the company's private-equity
ownership which tends to create some uncertainty around a company's
future financial policy. Often in private equity sponsored deals,
owners tend to have higher tolerance for leverage, a greater
propensity to favour shareholders over creditors as well as a
greater appetite for M&A to maximise growth and their return on
investment. While Moody's expects a more aggressive financial
policy going forward, Moody's recognises that the company has
historically maintained a prudent expansion strategy with limited
debt funded acquisitions and no large distributions to
shareholders.
STRUCTURAL CONSIDERATIONS
Polygon's debt capital structure comprises a EUR250 million senior
secured notes due 2023 (including the EUR40 million add-on), and a
EUR40 million super senior secured RCF due 2023. The B1 PD is at
the same level as the CFR, reflecting the use of a 50% recovery
rate as is typical for transactions including both bonds and bank
debt. The senior secured notes rated B1 are contractually
subordinated to the super senior secured revolving credit facility
(not rated).
Both instruments are guaranteed by the group's parent Polygon
Holding AB and certain subsidiaries, which together account for at
least 85% of consolidated EBITDA and are secured by pledges over
shares in group companies and intercompany loans. Given the weak
collateral value of such assets in a potential default scenario,
the LGD analysis assumes these instruments as unsecured.
RATING OUTLOOK
The stable outlook reflects Moody's view that the company's
financial metrics will improve over the next 12-18 months. This is
driven by moderate organic growth, EBITDA-accretive acquisitions
and slight margin improvement from ongoing productivity efforts
across the company and cost control.
FACTORS THAT COULD LEAD TO AN UPGRADE/DOWNGRADE
Positive rating pressure could arise, if Polygon's (1)
Moody's-adjusted debt/EBITDA declined and were sustained below
3.5x, (2) Moody's-adjusted EBIT margins were sustained at 6.5% or
higher, and (3) improves its liquidity profile with
Moody's-adjusted FCF/debt ratio exceeding 10%.
Downward pressure on the ratings could result from (1)
Moody's-adjusted debt/EBITDA exceeding 4.5x, (2) a deterioration of
its operating performance with Moody's-adjusted EBIT margins
falling towards 5.0%, and (3) failure to improve its liquidity
profile with FCF/debt metrics remaining below 5.0% for a sustained
period. Moreover, evidence of a more aggressive financial policy
such as larger debt-funded acquisitions and/or distributions to
shareholders would exert pressure on the ratings.
=====================
S W I T Z E R L A N D
=====================
DUFRY ONE: S&P Assigns 'BB' Rating on New EUR750MM Unsecured Notes
------------------------------------------------------------------
S&P Global Ratings said that it has assigned its 'BB' issue rating
to the proposed EUR750 million unsecured notes due 2027 to be
issued by Dufry One B.V. and guaranteed by Dufry AG and some of its
subsidiaries.
S&P said, "The recovery rating on the proposed senior unsecured
notes is '3', indicating our expectation of average (50%-70%;
rounded estimate: 50%) recovery in the event of a payment default.
The recovery rating reflects our understanding that Swiss travel
retailer Dufry will use the proceeds of the proposed notes to repay
in full its existing EUR700 million unsecured notes due 2023 and
part of the drawings on its revolving credit facility (RCF)."
KEY ANALYTICAL FACTORS
-- The proposed EUR750 million senior unsecured notes are rated
'BB' with a recovery rating of '3'. S&P understands that Dufry will
use the proceeds of the proposed notes to repay in full its
existing EUR700 million unsecured notes due 2023 and part of the
drawings under its RCF.
-- The recovery rating is supported by the limited prior ranking
liabilities but constrained by the significant amount of unsecured
debt. S&P's recovery expectation for the unsecured debt is around
50%.
-- In S&P's hypothetical default scenario, it assumes negative
regulatory changes, reduced airport travel following a natural
disaster or terrorist event, combined with an economic recession in
Europe.
-- S&P values the business as a going concern given Dufry's lead
market position in the duty-free travel retail market.
SIMULATED DEFAULT ASSUMPTIONS
-- Year of default: 2024
-- Jurisdiction: Switzerland
SIMPLIFIED WATERFALL
-- EBITDA at emergence: Swiss franc (CHF) 400 million (capital
expenditure represents 2% of three-year average sales; the
cyclicality adjustment is 5%, in line with the specific industry
sub segment; 5% operational adjustment reflecting significant
geographic and portfolio diversity)
-- Implied enterprise value multiple: 6.0x
-- Gross enterprise value at default: CHF2,410 million
-- Net enterprise value after administrative costs (5%): CHF2,290
million
-- Estimated priority claims: CHF103 million
-- Estimated senior unsecured claim: CHF4,130 million*
-- Value available for senior secured claims: CHF2,190 million
-- Recovery rating: 3 (50%-70%; rounded estimate: 50%)
Note: All debt amounts include six months of prepetition interest.
*Includes CHF1,300 million RCF assumed 85% drawn at default.
PEACH PROPERTY: Fitch Assigns B+(EXP) LT IDR, Outlook Stable
------------------------------------------------------------
Fitch Ratings assigned Peach Property Group AG an expected
Long-Term Issuer Default Rating of 'B+(EXP)' with a Stable Outlook
and an expected senior unsecured rating of 'BB-(EXP)'/'RR3'/67%.
The unsecured rating applies to Peach Property Finance GmbH's
prospective bond (guaranteed by Peach Property Group AG). The final
issuer and debt ratings are contingent on the acquisition of the
Grande portfolio in 4Q19, issuance of the EUR250 million 3.25-year
senior unsecured bond, and its documentation being similar to draft
terms received.
Peach Property is a small listed Switzerland head-quartered
property company that invests primarily in Germany residential
property for rent. With the EUR0.2 billion Grande portfolio to be
acquired in 4Q19, it has amassed a near CHF1.1 billion (EUR1
billion) German residential portfolio focusing on the North
Rhine-Westphalia region, away from the higher-rent cities where
rent controls are being proposed.
KEY RATING DRIVERS
NRW-Focused Portfolio: Peach's off-market-acquired portfolios have
core metrics broadly comparable with German peers, but Peach has
pockets of high vacancies to work through. The 4Q19 Grande
acquisition of 3,672 units complements Peach's existing footprint,
and its Peach Point network of customer service centres and digital
platform leads to better communication with local tenants and cost
savings for Peach compared with peers covering a Germany-wide
portfolio. Peach's small market share does not work against it, as
no participants command a regional market share that can influence
evidence for local rent setting.
Residential Rental Growth: Historically, German rental growth has
been pedestrian. German rents are subject to annual indexation
increases and/or rent indexation using districts' Rent Tables
(Mietspiegel) and the 2015 Rental Cap law (Mietpreisbremse),
although the latter is only applicable to 220 units (out of 12,500)
for Peach. Peach expects 4.5%-5.0% annual rental growth. This will
include a mix of (i) mainly inflation-related annual rent increases
for existing tenants; (ii) uplifts from re-letting of vacated
apartments; including (iii) those re-let after being refurbished,
net of vacancy activity; and (iv) reversionary uplift from around
1,000 units in the pro forma FY19 portfolio which are ex-public
supported funding. Consequently these previously-subdued rents can
increase closer to open market values.
Phasing of Potential Rent Increases: Rental growth will take time
to realise due to regulations on maximum annual increases, or
management phasing capex (according to local conditions, and/or
availability of quality craftsmen at the right price). On average,
where capex has been incurred, Peach expects 10% to 15% rent
increases for a renovated apartment when it is back on the market.
Peach is not exposed to cities that are proposing rent caps or with
heightened tenant affordability issues. Historical lack of supply,
increased urbanisation, and an increased number of smaller
households are conducive to ongoing stable rental growth in
Germany. Management reports significant over-subscription for its
available units. Fitch has not included significant rental uplift
in its conservative rating case.
High Vacancy Rates: Vacancies suggest opportunities for landlords
to re-set an apartment's rent closer to market rent, particularly
if it has been renovated. Peach's vacancy rates are higher than the
2% to 4% industry norms. Peach acquired two portfolios at
Neukirchen in 2015 and Fassberg in 2016 (5% of YE18 portfolio),
which have gradually reduced vacancies to 62% and 45% after
buildings have been renovated. Together with the high-vacancy
Rheinland and Kaiseslautern I portfolios, this represents potential
rental uplift after capex. Until then, Peach incurs the cost of
acquisition and vacancy costs (the latter around 1% to 2% of gross
rents).
Concentrated Small Unencumbered Portfolio: The planned EUR250
million unsecured bond's main recourse is to the unencumbered
Grande portfolio owned by Peach Property Group (Deutschland) AG,
which is valued at EUR291.5 million year-end 2019. The rest of the
group is funded by secured bank facilities that amortise, with
attached pledged assets (some with significant
over-collateralisation that is difficult to more efficiently
package or refinance). The Grande portfolio has around 10% vacancy
rates and a EUR113 million (39%) concentration of assets in
Gelsenkirchen (an ex-industrial city with a low purchase power
index and high unemployment).
Recovery Rating of 'RR3'/67%: In its bespoke recovery analysis,
Fitch has used the liquidation approach, and the recent
post-acquisition independent valuation of the Grande portfolio of
EUR291.5 million. Fitch's recovery estimate, upon default, also
assumes a standard 20% reduction in real estate values, and 10%
administration costs resulting in a 'RR3'/67%. Unsecured debt is
the proposed EUR250 million bond and a CHF66 million (CHF55m
unsecured drawn) at the Peach Property Group (Deutschland) AG
level. As per Fitch's criteria, this recovery analysis assumes no
timely recovery from the encumbered secured portfolios controlled
by the group's secured creditors.
Leveraged Capital Structure: At FY20 pro-forma 23.6x net
debt/EBITDA, Peach's capital structure has high leverage consistent
with its 65% LTV (historically 75%-80%). Using rental-derived
EBITDA, interest cover is healthy at 1.6x but the group's FY20-22
FFO is small at CHF11-15 million in each year. Management's
financial policy includes less than 55% LTV and interest cover more
than 1.5x, minimum cash of CHF20 million. Peach has not paid a
dividend. It reports an intention to raise further equity, with the
existing CEO shareholder willing to be diluted from his current
13.46% stake. Hybrids are treated as 100% debt.
Limited Liquidity: Management intends to run the group with CHF20
million of cash on balance sheet. The group also has CHF11 million
undrawn and available under the Peach Property Group (Deutschland
AG unsecured facility. Fitch's liquidity score is below 1x (1H18:
0.8x) including secured debt amortisations.
DERIVATION SUMMARY
Fitch has compared Peach with German residential peers. Its
portfolio is broadly comparable with larger peers' portfolios as
measured by market value per sq m, in-place-rent per sq m, gross
yield for the location and quality. Peach's portfolio is different
in that it has markedly higher vacancy rates (June 2019 pro forma:
10.2%, or 7.7% without renovation properties), which stems from
when some portfolios were acquired, with properties awaiting
renovation and re-letting. Over time, this provides an opportunity
for increased rents.
Peach's pro forma end-December 2019 net debt/EBITDA leverage of
around 24x is high, consistent with its historical high LTVs.
Relative to office and retail property company metrics, residential
net debt/EBITDA ratios will be higher because of the asset class's
tighter income yield and lower risk profile. Given the current and
prospective conducive supply and demand dynamics, German
residential has a more stable income profile.
Peach's current small size, its overall secondary quality of the
portfolio (given vacancies, and average rents), reliance on secured
funding, and current high leverage frame Peach's IDR within the
upper end of the 'B' rating category. Fitch expects this profile to
improve as the company acquires similar portfolios and accesses
additional unsecured debt.
KEY ASSUMPTIONS
4Q19 events:
Acquisition of the Grande portfolio subsequently revalued at
CHF320.7 million (EUR291.5 million)
CHF278million (EUR250 million 3.25-year unsecured bond)
Conversion of CHF28 million of the CHF58 million convertible hybrid
into equity
2020 events:
Sale of Swiss property activities for CHF69 million repaying CHF69
million of secured debt
CHF6 million equity increase
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to
Positive Rating Action
- Leverage (for residential) 20x net debt/EBITDA and EBITDA net
interest coverage above 1.5x
- Vacancies around 7% to 8%
- Continued commitment to an unencumbered balance sheet resulting
in an unencumbered asset cover above 1.5x
- For the property company recovery unsecured sector uplift: a
larger, more diversified, unencumbered portfolio base.
Developments That May, Individually or Collectively, Lead to
Negative Rating Action
- Leverage (for residential) 24x net debt/EBITDA and EBITDA net
interest coverage below 1.2x
- Costs for holding vacancies increasing to 5% of rent roll
- Contrary to new financial policy, incurring more secured
funding
- For the bespoke Recovery Rating: a decrease in the valuation of
the unencumbered portfolio.
LIQUIDITY AND DEBT STRUCTURE
Limited Liquidity: Management intends to run the group with CHF20
million of cash. The group also has CHF11 million undrawn and
available under the Peach Property Group (Deutschland) AG unsecured
facility.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section the highest level of ESG
credit relevance is a score of 3. ESG issues are credit-neutral or
have only a minimal credit impact on the entity, either due to
their nature or to the way in which they are being managed by
Peach.
PEACH PROPERTY: S&P Assigns Prelim. 'B+' ICR, Outlook Positive
--------------------------------------------------------------
S&P Global Ratings assigned its preliminary 'B+' long-term issuer
credit rating to Peach Property Group AG (PPG) and its preliminary
'BB-' issue rating to its proposed senior unsecured notes. S&P's
preliminary recovery rating on these notes is '2'.
S&P said, "The preliminary rating on Peach Property Group AG (PPG)
reflects our view of the company's relatively small portfolio size,
its focus on secondary cities in Germany, and its relatively high
leverage ratios. We note, positively, that PPG has successfully
reshaped its business from development properties to pure
rental-income-producing properties over the past few years." This
move was further enhanced by PPG's recent acquisition of around
3,650 apartments valued at about Swiss franc (CHF) 292 million,
which took PPG's total ownership to around 12,450 units, worth
about CHF1.1 billion (about EUR1 billion).
PPG's residential portfolio is spread across small-to-midsize
German towns in the catchment areas of larger metropolitan regions,
such as Kaiserslautern (about 2,012 units owned),
Gelsenkirchen/Gladbeck (about 1,260 units owned), and Oberhausen
(about 1,916 units owned). S&P said, "We view these locations as
having less dynamic macroeconomic fundamentals than the big seven
cities (Berlin, Hamburg, Munich, Cologne, Frankfurt, Dusseldorf,
and Stuttgart). Nevertheless, rents and real estate prices have
also been increasing in most of PPG's locations in the past 12-24
months. However, we estimate that 20%-30% of the portfolio is
located in areas with below-average economic conditions and higher
unemployment rates compared with Germany as a whole." These areas
are also characterized by stagnating, or even slightly declining,
population growth, and a higher proportion of tenants with
low-to-mid range monthly incomes and high sensitivity to rent
increases.
S&P views PPG's asset quality as average to low, underpinned by the
company's strategy to focus on value-add acquisitions with slightly
higher-than-average vacancies and renovation potential. The rents
for most of PPG's apartments are below market rates, with an
average rent per square meter of EUR5.02. The portfolio has a
relatively high vacancy rate of about 10%, which relates to a
couple of distressed assets that PPG purchased a few years ago and
is still stabilizing. S&P notes that the company has successfully
decreased vacancy rates for select properties in the past, as well
as its relatively large refurbishment plan to reduce vacancies and
achieve higher rents following the capital expenditure (capex).
PPG has now transitioned away from its relatively unprofitable
development activities, with only one development project left to
sell, which is a group of high-end apartments in Zurich. S&P said,
"We expect this sale to complete in the coming months. We view
positively the company's focus on the German residential segment,
since we view this segment as more stable, with lower volatility in
rents and asset values than other countries and the commercial real
estate sector as a whole. We believe that demand from German
households for midsize apartments with midmarket rents will remain
stable in the portfolio's main geographic locations." Additionally,
PPG benefits from having no concentration on any single asset and a
broad tenant base. The average tenant stay is about nine years,
with limited tenant rotation, in line with the German industry
standard.
S&P said, "PPG's financial risk profile is based on our view of the
company's relatively high debt leverage compared with other German
residential real estate peers. We project that PPG's S&P Global
Ratings-adjusted ratio of debt to debt plus equity will be about
70% at year-end 2019, with the adjusted EBITDA-to-interest ratio at
about 1.5x. We expect that these ratios will improve, and estimate
that leverage will decrease closer to about 65%, with EBITDA
interest coverage approaching 1.6x by year-end 2020. We take into
account the company's high ratio of debt to EBITDA of about 19x in
2019, but note that the ratio is somewhat distorted due to asset
rotation during the year.
"We understand that PPG is committed to deleveraging and its
financial policy is to achieve a loan-to-value ratio below 55%,
translating into our ratio of adjusted debt to debt plus equity of
60%-65%. For the deleveraging to occur, we note that the company
may have to rely on a capital injection, achieve a positive asset
revaluation, and use cash conservatively. We treat PPG's two
outstanding hybrid instruments, which total about CHF85 million, as
debt, as we understand that the company's intention is to repay the
instruments. We believe there is a strong intention to redeem the
instruments given the significant step-up on the first call date of
at least 625 basis points to 9.25% plus three-month LIBOR."
PPG has an average debt maturity profile of six years, pro forma
its proposed notes issuance, and an average cost of debt of 2.6%.
S&P said, "Our comparable rating analysis--whereby we assess an
issuer's credit characteristics in aggregate--constrains the rating
on PPG by one notch. This mostly reflects our assessment of PPG's
financial risk profile at the lower end of our aggressive category
because of its higher leverage than peers we rate with the same
financial profile. It also partly reflects PPG's relatively small
cash flow base due its recent ramp-up of property acquisitions and
small scale and portfolio size compared to higher-rated peers'.
"The final rating will depend on our receipt and satisfactory
review of all the final transaction documentation for the proposed
senior unsecured notes issuance of approximately EUR250 million.
Accordingly, the preliminary ratings should not be construed as
evidence of final ratings. If S&P Global Ratings does not receive
the final documentation within a reasonable timeframe, or if the
final documentation departs from the materials reviewed, we reserve
the right to withdraw or revise our ratings. Potential changes
include, but are not limited to, utilization of note proceeds,
maturity, size, and conditions of the notes, financial and other
covenants, and security and ranking of the notes.
"The positive outlook reflects our view that we may raise the
ratings within the next six-to-12 months if PPG's overall credit
profile improves more than we anticipate and if the company reduces
leverage such that our ratio of debt to debt plus equity moves
below 65% on a sustainable basis. This could result from
equity-financed acquisitions or an overall reduction of outstanding
debt.
"We would raise the rating within the next six-to-12 months if PPG
reduces its ratio of adjusted debt to debt plus equity to below 65%
on a sustainable basis, while sustaining its EBITDA interest
coverage above 1.3x. An upgrade would also require PPG's business
operations to continue benefiting from positive fundamentals such
as rising rental income and falling vacancy rates.
"Additionally, we would also view positively a sustainable
reduction in PPG's debt-to-EBITDA ratio to below 13x.
"We might revise our outlook to stable if PPG failed to improve its
credit metrics in the next six-to-12 months and achieve a ratio of
debt to debt plus equity of close to 65% or below, or if EBITDA
interest coverage were to fall to below 1.3x. We would also view
operating fundamentals becoming challenging as credit-negative,
including falling rents, decreasing asset prices, or rising vacancy
rates."
===========================
U N I T E D K I N G D O M
===========================
CONNECT BIDCO: S&P Assigns B+ Issuer Credit Rating, Outlook Stable
------------------------------------------------------------------
S&P Global Ratings assigned a 'B+' long-term issuer credit rating
to Connect Bidco Ltd. (Inmarsat). S&P also assigned 'B+' issue
ratings and '3' (65%) recovery ratings to Connect Bidco's $2.075
billion senior secured notes, $1.75 billion senior secured term
loan B, and $700 million revolving credit facility (RCF).
S&P bases its rating on Connect Bidco Ltd. (Inmarsat) on the
company's highly leveraged capital structure following its
leveraged buyout. A consortium comprising Apax Partners, Warburg
Pincus, CPPIB, and OTPP has agreed to acquire Inmarsat, funded by
$2.075 billion in senior secured notes, a $1.75 billion senior
secured term loan B, and common equity of $2.664 billion. The debt
financing was closed in September 2019, and the acquisition is
expected to close in November 2019.
As a result of the buyout, Inmarsat's reported debt will increase
to $3.825 billion from $2.466 billion at year-end 2018. S&P
forecasts that S&P Global Ratings-adjusted leverage will decline
toward 5x by 2021 from an initial peak of 6x in 2019, predominantly
because of significant revenue growth in the in-flight connectivity
(IFC) division, combined with EBITDA margin expansion as more
revenue is based on recurring high-margin air-time, rather than
low-margin installation. The rating also reflects S&P's view that
Inmarsat's business is stronger than peers such as Viasat and
Hughes, due to its strong position in the mobility segment and its
profitability.
S&P said, "Although supply should increase from 2022, when we
expect competitors to launch more satellites, most of Inmarsat's
forecast revenues in IFC are already contracted under relatively
lengthy contracts lasting five to 10 years. In addition, we note
that switching costs are high, as IFC antennas cost around $500,000
per aircraft to install. Therefore, we see limited downside to the
existing base case for this segment.
"We expect capex levels to moderate as the company completes its
Global Xpress (GX) satellite constellation (which provides it with
a high-speed broadband network), and enters a period of lower
replacement capex and success-based capex. The rest of the high
capex requirements in 2019-2020 and increasing interest payments
after the leveraged buyout are expected to lead to negative free
operating cash flow (FOCF) of around $90 million-$110 million in
2019-2020. However, from 2022 onward, capex should fall to less
than $400 million, supported by the future cost of the new
generation GX 7, 8, and 9 satellites, which will be less than half
the cost of previous GX satellites. We forecast that FOCF could
reach break-even in 2021 and be positive and growing thereafter."
Inmarsat's fair business risk profile reflects its leading position
and well-known brand in global maritime satellite services, and
solid prospects for its government business. It also reflects its
focus on the mobility segment, which S&P considers much less
exposed to alternative technologies than other services provided
via satellites, such as video and consumer broadband. In addition,
the business benefits from Inmarsat's well-diversified customer
base, relatively high recurring revenue of about 80%, long
five-to-10 year contracts for IFC, and large committed backlogs and
significant switching costs for IFC and maritime
very-small-aperture terminal (VSAT). That said, contracts are
typically shorter than those for fixed satellite services (FSS)
operators such as Eutelsat S.A. and SES S.A. In addition, backlog
and profitability are weaker.
S&P said, "We expect revenue and EBITDA growth to rebound in
2020-2021, led by strong growth in IFC that is already contracted.
We expect Inmarsat to build on its global Ka spectrum band coverage
to expand its leading position in the fast-growing IFC market
outside of North America. In addition, the partnership with
Panasonic Avionics could materially boost IFC revenues by more than
we currently expect. Global Ka-band coverage (which uses the
26.5-40 gigahertz [GHz] segment of the electromagnetic spectrum)
through Inmarsat's GX-dedicated satellites also continues to
attract strong customer demand across the group's core maritime and
government segments. This coverage integrates with the group's
global L-band (frequencies in the 1GHz-2GHz range) coverage,
allowing the group to offer all its customers reliable access to
high-throughput communications. We consider that Inmarsat's sound
in-orbit and on-the-ground infrastructure will enable it to defend
its leading global position in mobile satellite services, despite
increasing competitive pressure from new entrants.
"Nevertheless, we anticipate that Inmarsat's markets and growth
prospects will become increasingly difficult over the long term.
Accrued industrywide competitive pressure started to affect its
maritime division in 2019, causing underlying revenue and EBITDA to
decline. At the same time, the interruption to Inmarsat's
collaboration with Ligado Networks has led the high-margin payments
it was receiving from the U.S. satellite firm to be put on hold,
leading adjusted leverage to increase by around 1x. Although we do
not assume that these payments will resume in our base case, the
resumption of payments would help it reduce leverage
significantly."
Inmarsat has been investing heavily in aviation cabin connectivity
and the group's next-generation satellite fleet. Competitors have
recently launched more high throughput satellites and have
scheduled launches of very high throughput satellites from 2022.
Within a few years, this is likely to change the global balance of
supply and demand and weigh on wholesale capacity prices.
Demand for additional capacity mainly comes from mobility markets,
which are the sole focus of Inmarsat's activities. Competition in
this area is likely to heat up as traditional FSS operators
increasingly turn to this high-volume-growth segment. In addition,
S&P expects that the transition from L-band to Ka-band, combined
with price competition from Iridium on the L-band, will depress
top-line growth in Inmarsat's core maritime segment, somewhat
offset by increasing revenues from existing customers that
transition from lower-priced narrowband to higher-priced VSAT.
S&P said, "The stable outlook indicates that we expect an improved
revenue mix in aviation to support solid EBITDA growth, allowing
the group to reduce adjusted debt to EBITDA to around 5.5x in 2020
and about 5.1x-5.3x by 2021; free cash flow will likely be close to
breakeven by 2021 as high capex levels moderate.
"We could lower our rating if we expect adjusted debt to EBITDA to
remain sustainably above 6x, combined with significantly negative
FOCF, or if EBITDA cash interest coverage fell to close to 2x. This
could occur because of weaker-than-expected performance in the
maritime division, or following debt-funded bolt-on acquisitions.
"We are unlikely to raise the rating over the next 12-24 months as
we do not anticipate that the group will sustain leverage below 5x
due to its financial sponsor ownership. Additionally, the rating
will likely remain constrained by the group's negative free cash
flow."
FIAT CHRYSLER: S&P Places BB+ ICR on Watch Pos. on Peugeot Merger
-----------------------------------------------------------------
S&P Global Ratings placed its ratings on Fiat Chrysler Automobiles
N.V. (FCA), including its 'BB+' issuer credit rating on the
company, on CreditWatch with positive implications.
FCA and Peugeot S.A. (PSA) announced their intention to merge their
respective businesses.
S&P Global Ratings believes that the combined group could benefit
from its increased scale, improved business diversity, and
relatively low leverage post-closing, but that synergies would take
time, involve meaningful implementation costs, and entail execution
risk.
S&P said, "The CreditWatch placement reflects our view of increased
rating upside resulting for FCA because we believe that the
combined group could benefit from its increased scale, improved
business diversity, and relatively low leverage post-closing,
judging by the proposed transaction's preliminary outline. This is
despite the proposed dividend payout of EUR5.5 billion ahead of the
merger. At the same time, we expect that meaningful synergies will
take time, involve meaningful implementation costs, and entail some
execution risk, given potential political resistance when it comes
to cost rationalization efforts.
"We will monitor developments related to the merger. We will
resolve the CreditWatch placement once there is certainty that the
transaction closes and after we have discussed with management the
combined entity's strategy, investment, and restructuring plans,
along with its financial policy. We could raise the rating one
notch to 'BBB-', in line with the rating we have on PSA, provided
we expect FOCF-to-sales of more than 2%. We could affirm the rating
at 'BB+' if more difficult industry conditions led to a decline in
profitability, or synergies happen slower, resulting in FOCF
generation of the combined group being significantly lower than in
our base-case scenario."
FINSBURY SQUARE 2019-3: DBRS Finalizes B(low) Rating on X Notes
---------------------------------------------------------------
DBRS Ratings GmbH finalized its provisional ratings on the notes
issued by Finsbury Square 2019-3 plc (the Issuer):
-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (high) (sf)
-- Class C Notes rated A (sf)
-- Class D Notes rated BBB (high) (sf)
-- Class E Notes rated BBB (low) (sf)
-- Class X Notes rated B (low) (sf)
The final ratings assigned to the Class B, Class C, Class D, Class
E, and Class X notes differ from the provisional ratings of AA
(sf), A (low) (sf), BBB (sf), BB (high) (sf) and CCC (sf),
respectively, firstly, because of the better composition of the
closing portfolio in comparison to the provisional portfolio, which
has led to an improvement in the credit quality and secondly,
because of the tighter spreads and step-up margins on Classes A
through X in the final structure.
The rating on the Class A Notes addresses the timely payment of
interest and ultimate repayment of principal on or before the final
maturity date in December 2069. The ratings on the Classes B, C, D
and E notes address the timely payment of interest once most senior
and the ultimate repayment of principal on or before the final
maturity date. The rating on the Class X notes addresses the
ultimate payment of interest and repayment of principal by the
final maturity date. DBRS does not rate the Class F Notes and Class
Z Notes.
The Issuer is a securitization collateralized by a portfolio of
owner-occupied (69.2% of the portfolio balance) and buy-to-let
(30.8%) residential mortgage loans granted by Kensington Mortgage
Company Limited (KMC) in England, Wales, and Scotland.
The Issuer issued six tranches of mortgage-backed securities (the
Class A Notes to Class F Notes) to finance the purchase of the
initial portfolio and to fund the pre-funding principal reserve.
Additionally, the Issuer issued two classes of non-collateralized
notes, the Class X Notes, and Class Z Notes, to fund the general
reserve fund (GRF) and the pre-funding revenue reserve and cover
initial costs and expenses. The Class X Notes are primarily
intended to amortize using revenue funds; however, if excess spread
is insufficient to fully redeem the Class X Notes, principal funds
will be used to amortize the Class X Notes in priority to the Class
F Notes.
The structure includes a pre-funding mechanism where the seller has
the option to sell recently originated mortgage loans to the
Issuer, subject to certain conditions. The acquisition of these
assets shall occur before the first payment date using the proceeds
standing to the credit of the pre-funding reserves.
The GRF, which was funded at closing with GBP 9.1 million
(equivalent to 2.15% of the balance of the Class A Notes to the
Class F Notes), will be available to provide liquidity and credit
support to the Class A Notes to Class E Notes. From the first
payment date onward, the GRF's required balance will be 2.0% of the
total balance of the Class A through Class F notes and, if its
balance falls below 1.5% of that balance, principal available funds
will be used to fund the liquidity reserve fund (LRF) to a target
of 2.0% of the balance of the Class A Notes and Class B Notes. The
LRF will be available to cover interest shortfalls on the Class A
Notes and Class B Notes as well as senior items on the
pre-enforcement revenue priority of payment. The availability for
paying interest on the Class B Notes is subject to a 10% principal
deficiency ledger condition.
As of September 30, 2019, the portfolio consisted of 1,833 loans
extended to 1,761 borrowers with an aggregate principal balance of
GBP 295.8 million. Loans in arrears for one to three months
represent 1.7% of the outstanding principal balance of the
portfolio and loans three or more months' delinquent represent
1.4%.
The portfolio includes 4.8% of help-to-buy (HTB) loans that have
borrowers supported by government loans (i.e., the equity loans,
which rank in a subordinated position to the mortgages). HTB loans
are used to fund the purchase of new-build properties with a
minimum deposit of 5% from the borrowers. The weighted-average
current loan-to-value ratio of the portfolio is 71.6%, which
increased to 72.7% in DBRS Morningstar's analysis to include the
HTB equity loan balances.
The majority of the portfolio (76.5%) relates to a
fixed-to-floating product, where borrowers have an initial
fixed-rate period of one to five years before switching to
floating-rate interest indexed to three-month LIBOR. Interest rate
risk is hedged through an interest rate swap. DBRS Morningstar has
considered the basis risk between three-month LIBOR after the
switch and SONIA due on the notes in its cash flow analysis.
Approximately 9.5% of the portfolio by loan balance comprises loans
originated to borrowers with at least one prior County Court
Judgment and 33.9% are either interest-only loans for life or loans
that pay on a part-and-part basis.
The Issuer has entered into a fixed-floating swap with BNP Paribas,
London branch (BNP London) to mitigate the fixed-interest rate risk
from the mortgage loans and the SONIA (i.e., the Sterling Overnight
Interbank Average Rate) payable on the notes. Based on the DBRS
Morningstar private rating on BNP London, the downgrade provisions
outlined in the documents and the transaction structural mitigants,
DBRS Morningstar considers the risk arising from the exposure to
BNP London to be consistent with the ratings assigned to the rated
notes as described in DBRS Morningstar's "Derivative Criteria for
European Structured Finance Transactions" methodology.
Citibank, N.A., London branch (Citibank London) holds the Issuer's
transaction account, the GRF, the LRF, the pre-funding reserves,
and the swap collateral account. Based on the DBRS Morningstar
private rating on Citibank London, the downgrade provisions
outlined in the documents and the transaction structural mitigants,
DBRS Morningstar considers the risk arising from the exposure to
Citibank London to be consistent with the ratings assigned to the
rated notes as described in DBRS's Morningstar "Legal Criteria for
European Structured Finance Transactions" methodology.
Notes: All figures are in British pound sterling unless otherwise
noted.
HOMEBASE: Cheltenham Store to Close on Dec. 20
----------------------------------------------
Madelaine Richards at GloucestershireLive reports that the
Cheltenham Homebase store located just off Tewkesbury Road will
close on Friday, Dec. 20.
According to GloucestershireLive, a spokesperson for Homebase said:
"The store is closing with the last day of trading set for Friday,
December 20, 2019.
"Homebase store colleagues have been informed and a consultation
process is ongoing."
Back in 2018, Homebase made a Company Voluntary Arrangement (CVA)
announcement and confirmed that a number of DIY stores would be set
to close which could cost around 1,500 roles, GloucestershireLive
relates.
LUDGATE FUNDING 2008-W1: S&P Affirms B-(sf) Rating on Cl. E Notes
-----------------------------------------------------------------
S&P Global Ratings raised its credit ratings on the class Bb, Cb,
and D notes and affirmed its ratings on the class A1, A2b, and E
notes issued by Ludgate Funding PLC series 2008-W1.
In this transaction, S&P's ratings address timely receipt of
interest and ultimate repayment of principal for all classes of
notes.
The rating actions follow the application of S&P's revised criteria
and S&P's full analysis of the most recent transaction information
that S&P has received, and they reflect the transaction's current
structural features.
Upon revising S&P's criteria for assessing pools of residential
loans, S&P placed its ratings on all of the transaction's classes
of notes under criteria observation. Following S&P's review of the
transaction's performance and the application of these criteria,
S&P's ratings on the notes are no longer under criteria
observation.
In S&P' opinion, the performance of the loans in the collateral
pool has slightly deteriorated since S&P's previous full review.
Since then, total delinquencies have increased to 5.2% from 4.1%.
The greater proportion of the pool attracting the maximum seasoning
credit benefitted our weighted-average foreclosure frequency (WAFF)
calculations. S&P's weighted-average loss severity (WALS)
assumptions have decreased at all rating levels as a result of
higher U.K. property prices, which triggered a lower
weighted-average current loan-to-value ratio.
WAFF And WALS Levels
Rating level WAFF (%) WALS (%)
AAA 21.01 47.16
AA 14.75 39.68
A 11.46 26.71
BBB 8.10 18.87
BB 4.66 13.58
B 3.80 9.43
Credit enhancement levels have increased for all rated classes of
notes since our previous full review.
Credit Enhancement Levels
Class CE (%) CE as of previous review (%)
A1 43.4 41.9
A2b 25.4 24.4
Bb 15.9 15.0
Cb 9.6 8.9
D 6.2 5.6
E 4.0 3.5
CE--Credit enhancement.
The notes benefit from a liquidity facility and a reserve fund,
neither of which are amortizing as the respective cumulative loss
triggers have been breached.
S&P said, "Our operational, legal, and counterparty risk analysis
remains unchanged since our previous full review. The bank account
provider (Barclays Bank PLC; A/Stable/A-1) breached the 'A-1+'
downgrade trigger specified in the transaction documents, following
our lowering of its long- and short-term ratings in November 2011.
Because no remedial actions were taken following our November 2011
downgrade, our current counterparty criteria cap the maximum
potential rating on the notes in this transaction at our 'A'
long-term issuer credit rating (ICR) on Barclays Bank.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class A1, A2b, and Bb notes is
commensurate with higher ratings than those currently assigned.
However, given the ratings on all the notes are capped at the
long-term ICR on Barclays Bank, we have affirmed our 'A (sf)'
ratings on the class A1 and A2b notes, and raised to 'A (sf)' from
'BBB+ (sf)' our rating on the class Bb notes.
"Our analysis also indicates that the available credit enhancement
for the class Cb and D notes is commensurate with higher ratings
than those currently assigned. However, given the nonconforming
nature of the pool, the high percentage of interest-only loans
(95.7%), and the junior position of these notes in the capital
structure, we have limited the raising of the ratings on the class
Cb and D notes to two notches, to 'BBB+ (sf)' from 'BBB- (sf)', and
to 'BB+ (sf)' from 'BB- (sf)', respectively.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class E notes is commensurate with the
currently assigned rating. The reserve fund is fully funded and
continues to increase as a percentage of the outstanding balance,
and prepayments are low. Therefore, we do not expect the issuer to
be dependent upon favorable business, financial, and economic
conditions to meet its financial commitment on the class E notes.
Consequently, we have affirmed our 'B- (sf)' rating on this class
of notes."
Ludgate Funding 2008-W1 is a U.K. RMBS transaction, which closed in
March 2008 and securitizes a pool of nonconforming loans secured on
first-ranking U.K. mortgages.
Ratings List
Ludgate Funding PLC (Series 2008-W1)
Class Rating to Rating from
A1 A (sf) A (sf)
A2b A (sf) A (sf)
Bb A (sf) BBB+ (sf)
Cb BBB+ (sf) BBB- (sf)
D BB+ (sf) BB- (sf)
E B- (sf) B- (sf)
===============
X X X X X X X X
===============
[*] BOOK REVIEW: Bankruptcy and Secured Lending in Cyberspace
-------------------------------------------------------------
Author: Warren E. Agin
Publisher: Bowne Publishing Co.
List price: $225.00
Review by Gail Owens Hoelscher
Red Hat Inc. finds itself with a high of 151 5/8 and low of 20 over
the last 12 months! Microstrategy Inc. has roller-coasted from a
high of 333 to a low of 7 over the same period! Just when the IPO
boom is imploding and high-technology companies are running out of
cash, Warren Agin comes out with a guide to the legal issues of the
cyberage.
The word "cyberspace" did not appear in the Merriam-Webster
Dictionary until 1986, defined as "the on-line world of computer
networks." The word "Internet" showed up that year as well, as "an
electronic communications network that connects computer networks
and organizational computer facilities around the world."
Cyberspace has been leading a kaleidoscopic parade ever since, with
the legal profession striding smartly in rhythm. There is no
definition for the word "cyberassets" in the current
Merriam-Webster. Fortunately, Bankruptcy and Secured Lending in
Cyberspace tells us what cyberassets are and lays out in meticulous
detail how to address them, not only for troubled technology
companies, but for all companies with websites and domain names.
Cyberassets are primarily websites and domain names, but also
include technology contracts and licenses. There are four types of
assets embodied in a website: content, hardware, the Internet
connection, and software. The website's content is its fundamental
asset and may include databases, text, pictures, and video and
sound clips. The value of a website depends largely on the traffic
it generates.
A domain name provides the mechanism to reach the information
provided by a company on its website, or find the products or
services the company is selling over the Internet. Examples are
Amazon.com, bankrupt.com, and "swiggartagin.com." Determining the
value of a domain name is comparable to valuing trademark rights.
Domain names can come at a high price! Compaq Computer Corp. paid
Alta Vista Technology Inc. more than $3 million for "Altavista.com"
when it developed its AltaVista search engine.
The subject matter covered in this book falls into three groups:
the Internet's effect on the practice of bankruptcy law; the ways
substantive bankruptcy law handles the impact of cyberspace on
basic concepts and procedures; and issues related to cyberassets as
secured lending collateral.
The book includes point-by-point treatment of the effect of
cyberassets on venue and jurisdiction in bankruptcy proceedings;
electronic filing and access to official records and pleadings in
bankruptcy cases; using the Internet for communications and
noticing in bankruptcy cases; administration of bankruptcy estates
with cyberassets; selling bankruptcy estate assets over the
Internet; trading in bankruptcy claims over the Internet; and
technology contracts and licenses under the bankruptcy codes. The
chapters on secured lending detail technology escrow agreements for
cyberassets; obtaining and perfecting security interests for
cyberassets; enforcing rights against collateral for cyberassets;
and bankruptcy concerns for the secured lender with regard to
cyberassets.
The book concludes with chapters on Y2K and bankruptcy; revisions
in the Uniform Commercial Code in the electronic age; and a
compendium of bankruptcy and secured lending resources on the
Internet. The appendix consists of a comprehensive set of forms for
cyberspace-related bankruptcy issues and cyberasset lending
transactions. The forms include bankruptcy orders authorizing a
domain name sale; forms for electronic filing of documents;
bankruptcy motions related to domain names; and security agreements
for Web sites.
Bankruptcy and Secured Lending in Cyberspace is a well-written,
succinct, and comprehensive reference for lending against
cyberassets and treating cyberassets in bankruptcy cases.
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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
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