/raid1/www/Hosts/bankrupt/TCREUR_Public/211007.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Thursday, October 7, 2021, Vol. 22, No. 195
Headlines
F R A N C E
BOOST HOLDINGS: Moody's Assigns First Time B2 Corp. Family Rating
ILIAD HOLDING: Moody's Assigns First Time Ba3 Corp. Family Rating
I R E L A N D
ARBOUR CLO VIII: Moody's Assigns (P)B3 Rating to EUR12MM F-R Notes
PENTA CLO 2021-2: Moody's Gives (P)B3 Rating to EUR12.7MM F Notes
I T A L Y
824/19: Online Auction for Assets Begins Nov. 9
BACH BIDCO: S&P Assigns 'B' Issuer Credit Rating, Outlook Stable
MOBY SPA: Withdraws TRO v. Morgan Stanley, To Seek Chapter 15
SAN MARINO: Fitch Affirms 'BB+' IDR & Alters Outlook to Stable
SHIBA BIDCO: S&P Assigns Preliminary 'B' ICR, Outlook Stable
SPORT MANAGEMENT: Oct. 11 Deadline Set for Business Unit Offers
ZONCOLAN BIDCO: Moody's Assigns First Time B2 Corp. Family Rating
L U X E M B O U R G
CULLINAN HOLDCO: S&P Assigns Preliminary 'B+' ICR, Outlook Stable
R U S S I A
SAMARA OBLAST: S&P Alters Outlook to Pos. & Affirms 'BB+' LT ICR
S L O V A K I A
CONING: Slovakian Acquisition of Hotel Trakoscan in Final Phases
S P A I N
GRIFOLS SA: Fitch Assigns Final B+ Rating on Unsecured Notes
U N I T E D K I N G D O M
ARTEZ: Goes Into Administration, Project Faces Delay
CASTELL PLC 2019-1: Moody's Hikes Rating on Class F Notes From B2
DERBY COUNTY FOOTBALL: HMRC May Take Debt Haircut to Rescue Club
DERBY COUNTY FOOTBALL: Owes GBP15MM to MSD Holdings
NMCN: Sale May Secure Most of 1,700 Jobs, CEO Says
PATAGONIA BIDCO: Moody's Assigns First Time B2 Corp. Family Rating
PATAGONIA HOLDCO 3: S&P Assigns 'B' ICR, Outlook Stable
PREFERRED RESIDENTIAL 06-01: Fitch Cuts Class E1c Debt Rating to B-
SOUTHERN PACIFIC 06-A: Moody's Ups Class D1 Notes Rating to B2
TOWD POINT 2019-GRANITE 4: Fitch Raises Cl. F Debt Rating to 'BB+'
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F R A N C E
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BOOST HOLDINGS: Moody's Assigns First Time B2 Corp. Family Rating
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Moody's Investors Service has assigned a first-time B2 corporate
family rating and B2-PD probability of default rating to Boost
Holdings 2, a holding company owner of French distributor of office
supplies Bruneau. Concurrently, Moody's has assigned B2 ratings,
with a loss given default (LGD) assessment of LGD3, to the proposed
EUR305 million guaranteed senior secured term loan B (TLB) and
EUR60 million guaranteed senior secured revolving credit facility
(RCF) to be both borrowed by Boost Holdings 2. The outlook is
stable.
The proceeds from the proposed transaction will be used to (1)
repay certain existing debts; (2) partly pay the equity value of
the company as part of the change in ownership, and (3) pay related
transaction costs.
"Bruneau's B2 rating reflects the company's well established
position in the online business-to-business (B2B) distribution of
office supplies in France and Benelux region, its good track record
of profitable growth and its asset-light and agile business model",
says Guillaume Leglise, a Moody's Vice-President -- Senior Analyst.
"In addition, the company presents good credit metrics with an
opening leverage of 4.1x and a strong free cash flow generation,
which position the company comfortably in its rating category.
However, the rating also incorporates Bruneau's small scale, its
inherent exposure to Small and medium-sized enterprises (SMEs) and
economic cycles, and the highly competitive nature of the
industry", adds Mr Leglise.
RATINGS RATIONALE
The B2 CFR primarily reflects (1) Bruneau's established position in
the Business-to-business (B2B) office equipment supply markets in
France and Benelux, supported by a distinct customer approach and
large product offering, (2) its strong digital platform and
logistic infrastructure, (3) its good track record of customer
acquisition and retention, leading to sustained sales and earnings
growth historically, including during the covid-19 crisis, (4) its
good credit metrics for the rating category, supported by high
margins of around 14% (Moody's-adjusted EBIT margin) and a strong
current trading in the first 8 months of 2021, and (5) its adequate
liquidity and strong free cash flow (FCF) expected to be sustained
in the next 12-24 months, reflecting its asset-light business model
and limited capital spending requirements.
At the same time, the rating is constrained by (1) Bruneau's
intrinsic exposure to macroeconomic cycles and to French SMEs, (2)
its small size compared with global office supply distributors or
specialized retailers, (3) its limited geographical reach, although
improving recently thanks to acquisitions in Italy and Spain, (4)
the highly fragmented and competitive nature of the industry, which
also faces declining demand for traditional office products owing
to the work-from-home, digitalisation and the go "green" movement,
and (5) its more acquisitive strategy in recent years which creates
execution risks.
LIQUIDITY
Pro forma for the proposed transaction, Bruneau's liquidity is
considered to be adequate. Although Bruneau's initial cash balance
will be very limited, at only EUR5 million, Moody's expects
positive FCF over the next 18 to 24 months, as seen historically,
reflecting the company's high margins, low working capital
requirements and low capital spending needs. Also, the company will
have full access to a EUR60 million RCF. The TLB and RCF are
subject to a maintenance net leverage covenant, with ample headroom
at the closing of the transaction. This covenant will be tested
from Q1 2022, with step-downs every quarter thereafter.
Bruneau's proposed TLB is due in October 2028, while its RCF is due
in April 2028.
ESG CONSIDERATIONS
Overall, Moody's considers environmental and social risks to be low
for the distribution and supply chain industry. Bruneau can be a
direct source of air pollution or carbon emissions through its
delivery fleet. In addition, as an online distributor, Bruneau is
exposed to social risks related to the use of big data and customer
data, which can create privacy and legal issues. However, Moody's
sees these risks as manageable considering the company's digital
know-how and its continued investments to develop its IT
infrastructure.
In terms of corporate governance, Bruneau is controlled by
Towerbrook, which, as is often the case in levered,
private-equity-sponsored deals, has some tolerance for leverage and
where governance can be comparatively less transparent. The company
has pursued an acquisitive strategy in recent years, which Moody's
expects to continue going forward, although recent acquisitions
have been of modest size and usually financed in cash. The company
has a good track record of deleveraging to date.
STRUCTURAL CONSIDERATIONS
The CFR is assigned at Boost Holdings 2, which is the top entity of
the restricted group and the borrower of the senior credit
facilities. The capital structure consists of a senior secured TLB
for a total amount of EUR305 million and a EUR60 million senior
secured RCF. The TLB and RCF benefit from the same maintenance
guarantor package, including upstream guarantees from guarantor
subsidiaries, representing around 85% of the company's consolidated
EBITDA. Both instruments are secured, on a first-priority basis, by
share pledges in each of the guarantors; security assignments over
intercompany receivables; and security over material bank accounts.
However, there are significant limitations on the enforcement of
the guarantees and collateral under Belgian and French laws.
The senior bank debt instruments are rated B2, in line with the
CFR, reflecting the fact that these represent the only financial
debt in the company's capital structure. Bruneau's PDR is B2-PD,
reflecting the use of a 50% Family Recovery Rate, consistent with a
debt structure which is composed of senior bank debt only with a
relatively weak financial maintenance covenant. Although the net
leverage maintenance covenant is subject to step-downs every
quarter, the EBITDA headroom at the closing of the transaction is
significant at above 50%.
The capital structure also includes a shareholder loan of €93
million, which matures in April 2029, six months after the TLB.
This shareholder loan is treated as equity for the purpose of
Moody's metrics calculations.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that Bruneau will
sustain its current operating performance, with single-digit
organic growth and broadly stable operating margins despite the
current cost inflation, leading to a Moody's-adjusted gross
leverage hovering around 4.0x in the next 12 to 18 months. Moody's
also expects the company to generate positive free cash flows and
to maintain an adequate liquidity profile. Finally, the stable
outlook does not assume material acquisitions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive pressure on the rating could occur if the company
continues to successfully execute its strategy including customer
acquisition, further strengthening of its digital capabilities and
integration of recent acquisitions. Quantitatively, upward pressure
could arise if the company displays sustained growth in sales and
earnings, its Moody's-adjusted debt/EBITDA ratio falls below 4.0x
on a sustainable basis and its Moody's-adjusted FCF/Debt ratio is
maintained in the low teens (in percentage terms). An upgrade would
also require Bruneau to display a good liquidity profile while
demonstrating balanced financial policies.
Conversely, negative pressure on the rating could materialise if
Bruneau's debt/EBITDA ratio exceeds 5.5x, or if the company's
customer base contracts meaningfully. Downward ratings pressure
could also arise if FCF weakens significantly or if the company
does not maintain an adequate liquidity at all times.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Distribution &
Supply Chain Services Industry published in June 2018.
COMPANY PROFILE
Headquartered in Villebon-sur-Yvette, France, Bruneau is an online
distributor of office supplies. The company primarily focuses on
the B2B market in France and the Benelux region, targeting mostly
SMEs. In 2020, Bruneau reported EUR440 million in net sales and
EUR65 million in EBITDA (as adjusted by the company, pre-IFRS 16),
pro forma for the acquisition made in 2021 in Italy. During the
same period and pro forma for acquisitions, France represented
approximately 63% of group net sales, while the remainder was
mostly generated in Benelux (20%), Italy (13%) and Spain (4%).
In September 2021, TowerBrook reached an agreement to acquire
Bruneau from Equistone in a leverage buyout transaction. Equistone
is expected to maintain a stake in Bruneau for up to 18%.
TowerBrook is expected to own the majority of the company's capital
(at least 64%), while management and employees would own 18%.
ILIAD HOLDING: Moody's Assigns First Time Ba3 Corp. Family Rating
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Moody's Investors Service has assigned a first-time Ba3 corporate
family rating and a Ba3-PD probability of default rating to Iliad
Holding (or "the company"). Iliad Holding is the financial vehicle
owned by Mr Xavier Niel that controls Iliad S.A. ("Iliad"), a
European telecommunications operator with presence in France, Italy
and Poland.
Concurrently, Moody's has assigned a B2 rating to the EUR3.6
billion euro equivalent guaranteed senior secured notes due in 2026
and 2028 to be issued by Iliad Holding. The outlook is stable.
Proceeds from the new financing will be used to repay the EUR3.6
billion Bridge to Bond Facility, which, together with the EUR1.2
billion Bridge to Disposal Facility, were raised to fund the take
private offer of Iliad.
"The Ba3 rating primarily reflects Iliad's scale and strong market
position in France, Italy and Poland, as well as it good track
record of revenue growth," says Ernesto Bisagno, a Moody's Vice
President - Senior Credit Officer and lead analyst for Iliad
Holding.
"However, the rating also factors in the company's high leverage,
the highly competitive market environment and the execution risk
from M&A activity," adds Mr. Bisagno.
On September 29, 2021, Iliad announced [1] the results from the
tender offer launched by Mr Niel on July 30, 2021. Following the
tender offer, Iliad Holding increased its ownership in Iliad to
96.46% from 69%. Iliad Holding will request a squeeze-out of the
minorities at the same price of the tender offer (EUR182 per share)
with the delisting of Iliad expected in the first half of October.
On September 22, 2021, Iliad announced [2] an agreement to buy UPC
Poland for PLN7 billion (around EUR1.5 billion), with the deal
expected to close in H1 2022, subject to regulatory approval. The
acquisition will be funded through a combination of existing cash
and new debt at Polish subsidiary Play Communications S.A.
("Play"). Following the acquisition, the company will become the
second largest operator in Poland behind Orange. The acquisition of
UPC Poland will strengthen the competitive profile of Iliad in
Poland and provide synergy opportunities, but it will also increase
execution risks from the integration.
RATINGS RATIONALE
Iliad Holding's Ba3 rating reflects: (1) Iliad's scale and
geographical diversification owing to the company's presence in
France, Italy and Poland; (2) its strong positioning in the French
and Polish telecom markets with a growing market share in the
Italian mobile segment; (3) its solid revenue growth rates and
margins, which remain above industry average levels; and (4) the
expectation of improved free cash flow (FCF) generation from 2021
onwards.
However, the rating also reflects: (1) the company's high initial
Moody's adjusted leverage of around 5.2x following the debt
financed expansions in Italy and Poland, and the debt incurred to
fund share buybacks and the take private deal; (2) uncertainties
around the path of deleveraging and, more broadly, financial
policies going forward owing to the concentrated ownership despite
management's commitment to deleverage in the short term to below
4.0x; (3) the highly competitive market environment; (4) the
sustained capex levels largely as a consequence of 5G investments
in France and the roll-out of its own network in Italy, which put
pressure on free cash flow generation; and (5) modest execution
risk from M&A activity.
Iliad experienced a strong increase in revenues over 2019-21,
driven by a combination of positive organic growth in Italy and
France, and contribution from the acquisition of Play in Poland.
Underlying growth was particularly strong in H1 2021, with revenue
and EBITDA (before lease expenses) up by 33.7% and 42%,
respectively, (+4.9% and 17%, excluding M&A contribution), with the
Italian operations reaching break even for the first time since
launch, driven by stronger revenue and good progress being made
with the network roll out plan.
Despite the strong growth, the company's Moody's adjusted free cash
flow was negative due to high capex investments. In addition, debt
in 2020 increased due to a combination of the EUR1.4 billion share
buy-back programme and the EUR2.2 billion acquisition of Play. As a
result, the company's Moody's adjusted debt to EBITDA increased to
5.0x in 2020 (pro-forma for 12-months contribution from Play), from
4.0x in 2019. Over the past five years, Iliad's adjusted debt has
increased from EUR3.4 billion in 2016 to EUR19.6 billion expected
in 2021 including the new debt at Iliad Holding level.
Moody's expects Iliad's revenue to increase by 25%-30% in 2021, and
by 10% in 2022, driven by the contribution from the acquired assets
in Poland, and organic growth. Despite strong growth, the rating
agency expects negative free cash flow generation in 2021 of around
EUR200 million - EUR250 million because of the high growth capex.
Moody's expects free cash flow to turn positive in 2022 and reach
EUR200 million. However, Moody's anticipates additional material
funding requirements in 2022 mainly owing the spectrum payments,
particularly in Italy. As a result, the rating agency expects that
the company's Moody's adjusted debt to EBITDA will remain high at
5.2x in 2021, and decrease towards 4.8x in 2022.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
Moody's has factored into its decision to assign a Ba3 rating to
Iliad Holding the governance considerations associated with the
company's financial strategy and risk management as well as its
concentrated ownership. Following the take private deal, the
company will be tightly controlled by Mr Xavier Niel, who through
financial vehicle NJJ Holding, also owns other telecom assets in
Europe. The fact that there is an intragroup loan granted from
Iliad Holding to NJJ Holding, also blurs the separation between
Iliad Holing and NJJ, increasing the complexity of the whole
group.
In terms of financial policies, Moody's notes the company's higher
tolerance for leverage over time and that there is external debt
raised at different levels of the corporate structure, including
Play, Iliad and Iliad Holding, which makes the debt structure more
complex.
Uncertainties persist around the financial policy of the company
after the targeted delisting of Iliad. However, Moody's gains some
comfort from the company's expected public commitment to achieve
its net leverage target of 3.5x-4.0x together with the expectation
that the board composition and reporting quality, for both Iliad
and Iliad Holding, will remain unchanged.
LIQUIDITY
Iliad Holding's liquidity is satisfactory, reflecting the
assumption that the company will retain approximately EUR500
million of cash at the end of 2021 (assuming the repayment of the
EUR500 million bond due in Q4 2021), and will have access to three
multi-year revolving credit facilities of EUR1,650 million (at
Iliad), EUR443 million equivalent (at Play) and EUR300 million
equivalent (at Iliad Holding), respectively, at closing.
There are maintenance financial covenants on Iliad's and Play's
Revolving Credit Facilities (RCF) set at 3.75x and 3.25x,
respectively. Iliad Holding's RCF includes a springing leverage of
7.0x and expected to be tested once the RCF will be more than 40%
drawn. Headroom under the covenants is expected to remain adequate
over the next 12 months. Although the company will likely generate
positive FCF -before spectrum payments from 2022, Moody's
anticipates that the Italian spectrum payment in 2022 will be
financed through additional debt. Excluding the EUR1.2 billion
Bridge-to-Disposal Facility maturing in 2023, the next debt
maturities mainly include EUR500 million and EUR650 million bonds
at Iliad level maturing in 2021 and 2022.
STRUCTURAL CONSIDERATIONS
Moody's has used the standard 50% family recovery rate assumption
given that the capital structure includes a mix of both bank loans
and bonds. The B2 instrument rating on Iliad Holding's guaranteed
senior secured notes is two notches below the CFR, reflecting its
structural subordination to the debt raised at Play and Iliad, and
the contractual subordination to the super senior RCF at Iliad
Holding.
RATIONALE FOR STABLE OUTLOOK
The company will be initially weakly positioned in the rating
category with no headroom for operational underperformance against
current expectations. However, the stable outlook reflects Moody's
expectations that the company will be committed to a deleveraging
path and reduce its Moody's-adjusted leverage towards 4.6x, at the
latest by fiscal 2023, supported by ongoing operating performance
improvements in France, Poland and Italy. The stable outlook also
assumes that FCF will turn positive (before spectrum payments) in
2022 as funding needs in Italy and capex intensity in France will
likely moderate.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure in the next 12-18 months is unlikely but
could develop if the company successfully delivers on its business
plan, showing strong and stable revenue growth as well as a
sustainable improvement in EBITDA margins. Quantitatively, that
would require Moody's adjusted debt/ EBITDA to reduce below 3.75x
and Moody's adjusted retained cash flow (RCF) to improve towards
20%.
Downward pressure on the ratings could develop if operating
performance deteriorates relative to expectations or the company
engages in large debt-financed acquisitions, such that its Moody's
adjusted debt / EBITDA remains above 4.75x; its Moody's adjusted
RCF to debt stays below 15%; or if liquidity deteriorates
significantly.
LIST OF AFFECTED RATINGS:
Issuer: Iliad Holding
Assignments:
LT Corporate Family Rating, Assigned Ba3
Probability of Default Rating, Assigned Ba3-PD
BACKED Senior Secured Regular Bond/Debenture, Assigned B2
Outlook Actions:
Outlook, Assigned Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was
Telecommunications Service Providers published in January 2017.
COMPANY PROFILE
Iliad Holding is the holding company owned by Mr Xavier Niel which,
after the squeeze-out process will fully own Iliad.
Headquartered in Paris, Iliad is a leading telecommunications
operator in France, Italy and Poland, with 43.4 million subscribers
and more than 15,000 employees.
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I R E L A N D
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ARBOUR CLO VIII: Moody's Assigns (P)B3 Rating to EUR12MM F-R Notes
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Moody's Investors Service announced that it has assigned the
following provisional ratings to refinancing notes to be issued by
Arbour CLO VIII Designated Activity Company (the "Issuer"):
EUR3,000,000 Class X Senior Secured Floating Rate Notes due 2034,
Assigned (P)Aaa (sf)
EUR248,000,000 Class A-R Senior Secured Floating Rate Notes due
2034, Assigned (P)Aaa (sf)
EUR18,600,000 Class B-1-R Senior Secured Floating Rate Notes due
2034, Assigned (P)Aa2 (sf)
EUR20,000,000 Class B-2-R Senior Secured Fixed Rate Notes due
2034, Assigned (P)Aa2 (sf)
EUR24,400,000 Class C-R Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)A2 (sf)
EUR28,000,000 Class D-R Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)Baa3 (sf)
EUR22,000,000 Class E-R Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)Ba3 (sf)
EUR12,000,000 Class F-R Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)B3 (sf)
RATINGS RATIONALE
The rationale for the ratings is based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in Moody's methodology.
Interest and principal amortisation amounts due to the Class X
Notes are paid pro rata with payments to the Class A Notes. The
Class X Notes amortise by EUR375,000 over the eight payment dates,
starting on the second payment date.
The Issuer will issue the refinancing notes in connection with the
refinancing of the following classes of Notes: Class X Notes and
Class A Notes, Class B-1 Notes, Class B-2 Notes, Class C Notes,
Class D Notes, Class E Notes due 2033 (the "Original Notes"),
previously issued on August 17, 2020 (the "Original Closing Date").
On the refinancing date, the Issuer will use the proceeds from the
issuance of the refinancing notes to redeem in full the Original
Notes. The Original Notes were not rated by Moody's.
On the Original Closing Date, the Issuer also issued EUR250,000
Class M Notes and EUR33,700,000 of Subordinated Notes, which will
remain outstanding and are not rated by Moody's.
As part of this reset, the Issuer will increase the target par
amount by EUR100 million to EUR400 million. It has extended the
reinvestment period to 4.5 years and the weighted average life to
8.5 years. It has also amended certain concentration limits and
other features. In addition, the Issuer will include a base matrix
and modifiers that Moody's will take into account for the
assignment of the definitive ratings.
The Issuer is a managed cash flow CLO. At least 90% of the
portfolio must consist of secured senior loans or senior secured
bonds and up to 10% of the portfolio may consist of unsecured
senior loans, second-lien loans, high yield bonds and mezzanine
loans. The underlying portfolio is expected to be fully ramped as
of the closing date.
Oaktree Capital Management (Europe) LLP ("Oaktree") will continue
to manage the CLO. It will direct the selection, acquisition and
disposition of collateral on behalf of the Issuer and may engage in
trading activity, including discretionary trading, during the
transaction's 4.5-year reinvestment period. Thereafter, subject to
certain restrictions, purchases are permitted using principal
proceeds from unscheduled principal payments and proceeds from
sales of credit risk obligations and credit improved obligations.
The transaction incorporates interest and par coverage tests which,
if triggered, divert interest and principal proceeds to pay down
the notes in order of seniority.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 2020.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated notes' performance is subject to uncertainty. The notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the notes'
performance.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3 of
the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in December 2020.
Moody's used the following base-case modeling assumptions:
Target Par Amount: EUR400,000,000
Diversity Score: 55
Weighted Average Rating Factor (WARF): 3025
Weighted Average Spread (WAS): 3.60%
Weighted Average Coupon (WAC): 4.00%
Weighted Average Recovery Rate (WARR): 43.5%
Weighted Average Life (WAL): 8.5 years
PENTA CLO 2021-2: Moody's Gives (P)B3 Rating to EUR12.7MM F Notes
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Moody's Investors Service announced that it has assigned the
following provisional ratings to notes to be issued by Penta CLO
2021-2 Designated Activity Company (the "Issuer"):
EUR217,000,000 Class A Senior Secured Floating Rate Notes due
2034, Assigned (P)Aaa (sf)
EUR23,400,000 Class B-1 Senior Secured Floating Rate Notes due
2034, Assigned (P)Aa2 (sf)
EUR10,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2034,
Assigned (P)Aa2 (sf)
EUR21,000,000 Class C Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)A2 (sf)
EUR23,500,000 Class D Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)Baa3 (sf)
EUR18,000,000 Class E Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)Ba3 (sf)
EUR12,700,000 Class F Senior Secured Deferrable Floating Rate
Notes due 2034, Assigned (P)B3 (sf)
RATINGS RATIONALE
The rationale for the ratings is based on a consideration of the
risks associated with the CLO's portfolio and structure as
described in Moody's methodology.
The Issuer is a managed cash flow CLO. At least 90% of the
portfolio must consist of senior secured obligations and at least
70% of the portfolio must consist of senior secured loans.
Therefore, up to 10% of the portfolio may consist of senior
unsecured obligations, second-lien loans, mezzanine obligations and
high yield bonds. The portfolio is expected to be almost fully
ramped as of the closing date.
Partners Group (UK) Management Ltd ("Partners Group") will manage
the CLO. It will direct the selection, acquisition and disposition
of collateral on behalf of the Issuer and may engage in trading
activity, including discretionary trading, during the transaction's
four-year and a half reinvestment period. Thereafter, subject to
certain restrictions, purchases are permitted using principal
proceeds from unscheduled principal payments and proceeds from
sales of credit risk obligations or credit improved obligations.
In addition to the seven classes of notes rated by Moody's, the
Issuer will issue subordinated notes due 2034, which are not
rated.
The transaction incorporates interest and par coverage tests which,
if triggered, divert interest and principal proceeds to pay down
the notes in order of seniority.
Methodology underlying the rating action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in
December 2020.
Factors that would lead to an upgrade or downgrade of the ratings:
The rated notes' performance is subject to uncertainty. The notes'
performance is sensitive to the performance of the underlying
portfolio, which in turn depends on economic and credit conditions
that may change. The collateral manager's investment decisions and
management of the transaction will also affect the notes'
performance.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3 of
the "Moody's Global Approach to Rating Collateralized Loan
Obligations" rating methodology published in December 2020.
Moody's used the following base-case modeling assumptions:
Par Amount: EUR350,000,000
Diversity Score: 50
Weighted Average Rating Factor (WARF): 3000
Weighted Average Spread (WAS): 3.5%
Weighted Average Coupon (WAC): 3.50%
Weighted Average Recovery Rate (WARR): 43.8%
Weighted Average Life (WAL): 8.5 years
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I T A L Y
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824/19: Online Auction for Assets Begins Nov. 9
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The insolvent company 824/19 is selling a period building at 7/9
Via Clerici, Milan, of around 1,900 square meters in addition to
two inner courtyards and composed of a basement ground floor and
three upper floors used as residences, offices, storage rooms and
garages.
The online sale at www.doauction.it will take from November 9, 2021
to November 19, 2021.
The starting price is set at EUR15,500,000.
The company's receiver is Micaela Cecca.
For more information, contact Edicom Servizi Srl, Tel.
+39-0418622235 or visit
https://portalevenditepubbliche.giustizia.it
BACH BIDCO: S&P Assigns 'B' Issuer Credit Rating, Outlook Stable
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S&P Global Ratings assigned its 'B' long-term issuer credit rating
to Italy-based digital transformation and business consultancy
company Bach BidCo SpA and its 'B' issue rating to the senior
secured notes. The recovery rating on these rated notes is '3',
indicating its expectation of average recovery prospects (50%-70%;
rounded estimate 50%) in the event of payment default.
CVC Capital Partners, in partnership with management, acquired BIP
Group via a new entity, Bach BidCo SpA, for a total consideration
of EUR697.5 million. The transaction was funded using a bridge
facility of EUR275 million, EUR40 million of payment-in-kind (PIK)
notes at the holding company level, and an equity contribution of
about EUR368 million (52%). The company now intend to raise EUR275
million of senior secured notes to refinance the bridge facility.
The company proposes to raise EUR275 million of senior secured
notes to refinance its bridge facility, which financed CVC's
acquisition of BIP. Since BIP was founded via a spin-off from
Deloitte Consulting in 2003, the company has successfully grown
organically as well as inorganically, making multiple bolt-on
acquisitions while it was owned by Apax France and management
(until May 2021). CVC, in partnership with management, agreed to
buy BIP for about EUR697.5 million in cash and equity rollover,
including transaction fees, expenses, and repayment of existing
debt. The transaction was financed using EUR368 million of equity;
EUR275 million in a bridge facility; and EUR40 million in PIK
holdco notes. It was also supported by a EUR50 million super senior
revolving credit facility (RCF) which was undrawn at close. We
expect CVC to hold 75% of the shares and that management will
retain the remaining 25%. The co-founders will continue in their
roles.
The 'B' issuer credit rating on Bach BidCo SpA is constrained by
the company's financial sponsor ownership. We do not expect
adjusted leverage to fall much from its relatively high current
level of around 6.3x expected at year-end 2021. The company will
likely remain highly leveraged in the coming years, but with some
improvement year on year. Our credit metrics reflect only gross
debt, given the financial sponsor ownership.
Italy-based BIP has established itself as a leading IT and
management consultancy firm, with strong digital capabilities, in a
high-growth market. Over the past 18 years, the firm has
successively built up its presence and expertise in management
consulting, business integration, and digital transformation. The
company has successfully expanded its client base serving about 650
blue-chip clients from its workforce of about 3,300 consultants,
who are qualified with a range of technical certifications. The
service offering comprises more-traditional business advisory work,
such as operational excellence programs. It generates about
one-third of revenue from this segment and the rest from its niche
range of digital competencies. These include technological and
digital advisory services such as transformation; cloud
architecture; and the implementation of tailor-made strategies in
artificial intelligence (AI), cyber security, automation, and data
and analytics. The quality and capability of BIP's service offering
is demonstrated by the loyalty of its customer base and its
improving brand position. Its Top 10 accounts have been with the
business for an average of 18 years. In 2020, over 76% of revenue
was generated from clients that have been with the company for at
least three years.
COVID-19 accelerated the rising demand for digital transformation
and enhancement of technological infrastructure. S&P views BIP as
well positioned to benefit from the strong secular market growth we
anticipate for digital and nondigital consultancy between
2020-2024. The selection, integration, and implementation of
digital solutions linked to cloud services, data and analytics,
process automation, cyber security, and AI are likely to be key
growth areas. Companies in most end-markets will have to increase
IT spending after delaying projects during 2020. One consequence of
the pandemic is likely to be a higher percentage of employees
working from home, highlighting the need to modernize existing IT
infrastructure and enhance digital capabilities.
Although BIP's operations were largely unaffected during 2020, some
projects were delayed because the pandemic caused uncertainty in
the market. The company's organic growth was slower, at 7%, during
2020 than in recent years. Organic growth has been as strong as 17%
within the past three years. However, high utilization rates of
about 90% and improving employee turnover bolstered stable reported
margins of 15% during the year. BIP is well positioned across end
markets--no single industry represents more than 30% of revenue.
S&P expects BIP will benefit from a stronger organic growth
contribution from highly regulated sectors such as energy and
utilities; telecommunications, media, and technology (TMT);
financial services; the public sector; health care; and retail in
the coming years. In addition, COVID-19 materially disrupted the
value chains of organizations, accelerating the trend toward
digitalization, which will benefit BIP as its end customers are
reshaping their business models to gain long-term competitive
advantages.
BIP operates in a highly fragmented and competitive market, where
it is constrained by its lack of scale and limited geographical
diversification. BIP generates about 70% of its revenue from Italy,
15% in the U.K., and the rest in other regions. This exposes the
business to one economy, increasing concentration risk.
Furthermore, BIP's 2021 EBITDA is forecast to be only about EUR62
million, making it the smallest of our rated peers in this sector.
Many of its IT services and global consulting peers--such as
Accenture PLC and Capgemini SE--are larger and better-capitalized.
These larger peers also have a broader spectrum of services,
including their own, higher-margin proprietary solutions. These
allow them to lock-in clients in multiyear contracts, rather than
BIP's shorter-term contracts. That said, this risk is somewhat
offset by BIP's strong growth with existing customers and its
improving backlog. We expect these will provide BIP with sufficient
stability over the medium term.
BIP has a number of partnership agreements with world-leading IT
solutions providers to provide certifications and accreditations.
The agreements are renewed annually in line with industry
standards, which adds additional risk to the business. However, BIP
continues to expand and develop its certifications and
accreditations with these partners, minimizing the risk of renewals
and providing clients with an independent and tailored review and
best practices for their systems.
BIP's high fixed-cost base erodes its EBITDA margin compared with
larger peers. BIP's margin profile was only about 15% in 2020, but
this was constrained by a number of one-off costs related to
mergers and acquisitions (M&A) and employee bonuses. It remained
below its global competitors in the professional services industry,
such as ERM (Emerald 2) or AlixPartners, but higher than that of
French IT consultancy business Devoteam (Castillon SAS). S&P said,
"We forecast that BIP's adjusted margin profile will improve to
above 17% by the end of 2021, supported by margin-accretive
acquisitions, improved scale, reduced nonrecurring costs and cost
efficiencies. The cost structure is relatively rigid--about 70% of
costs are fixed--which is typical for the industry. We have
identified human capital as the key component to success and
growth. Only 4% of BIP's professionals are partners or directors,
suggesting that there could be some risk associated with the loss
of key personnel. However, this is somewhat mitigated by a larger
percentage of senior personnel being highly incentivized through
quasi-equity instruments in the company. We would also expect to
see more competition for highly skilled employees as a scarce
resource going forward, which could increase employee compensation
and squeeze margins further than we anticipate."
Despite the pandemic, BIP reported strong performance during 2020
and into 2021. BIP saw year-on-year revenue growth of close to 18%
in 2020, of which about 7% was organic growth. The business has
benefitted from good end-market diversity, with strong coverage in
industries that were less affected by the crisis, such as
insurance, utilities, banks, and TMT. Interim figures for the first
half of 2021 indicate another solid performance, year-on-year
revenue growth of about 32% and revenue up 11.5% on a like-for-like
basis as end-markets such as retail and manufacturing, which were
most affected by COVID-19, started to recover. S&P said, "For the
second half of the year, we expect like-for-like growth to remain
above 10% across the main verticals and end-markets, including
life-sciences, health care, financial services, and the public
sector, supported by its improved backlog. In addition, we believe
the company is well-positioned to benefit from the potential upside
driven by the EU Recovery Fund, which is expected to support
modernization in digital and technology capabilities."
S&P said, "We view positively the company's ability to generate
stable free operating cash flow (FOCF). We anticipate FOCF will be
minimal in 2021, largely affected by transaction fees and
nonrecurring expenses on employee bonuses because of this
transaction. However, we expect FOCF to improve above EUR20 million
in 2022 supported by the relatively low capital expenditure
requirement, modest working capital outflows, and improved EBITDA
base with limited impact from nonrecurring expenses in the coming
years. Furthermore, the group's comfortable FFO cash interest
coverage above 4x supports the company's highly leveraged
position.
"The stable outlook indicates that BIP will continue to generate
steady organic growth based on a supportive market environment and
positive cash flow generation, while maintaining leverage below
6.5x over the next 12 months. We expect its positive market
momentum to support further growth in the EBIDTA base and help BIP
reduce its adjusted leverage to below 6.0x in 2022-2023."
S&P could lower the rating if:
-- Economic headwinds or operational missteps resulted in FOCF
that was negative or limited on a sustained basis;
-- FFO cash interest coverage ratio was below 2.0x; or
-- The company pursued material debt-funded acquisitions, or
shareholder returns, such that leverage climbed above 7.0x on a
sustained basis.
MOBY SPA: Withdraws TRO v. Morgan Stanley, To Seek Chapter 15
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David Voreacos at Bloomberg News reports that beleaguered Italian
ferry operator Moby SpA dropped its request for an order blocking
Morgan Stanley from trading in the company's debt or interfering in
its restructuring.
Moby told a federal court in New York on Oct. 3 that it was
withdrawing its application for a temporary restraining order
against the bank, which it accused in a Sept. 27 lawsuit of
participating in a secret plan to foil its restructuring in Italy
and seize control from other creditors, Bloomberg relates.
According to Bloomberg, the company, which operates ferries between
the Italian mainland and islands like Sardinia, said it would now
be seeking Italian court permission to pursue its claims through a
Chapter 15 U.S. bankruptcy filing.
Morgan Stanley on Oct. 1 filed court papers deriding the U.S.
lawsuit as a meritless attempt to dictate the outcome of Moby's
Italian restructuring proceedings, Bloomberg recounts. The bank,
as cited by Bloomberg, said Moby failed to show that Morgan Stanley
interfered in Moby's relationship with its creditors or that it had
done anything wrong in purchasing the company's bonds.
Moby, which has been under pressure from increasing regulation,
tougher competition and weak freight traffic volumes, claimed in
its suit that Morgan Stanley traders Massimo Piazzi and Hillel
Drazin illegally conspired with investor Antonello Di Meo, a former
employee of Sound Point Capital Management, Bloomberg discloses.
The Italian company said it recently reached a deal with other
creditors on a restructuring plan that would let it avoid
liquidation, but Mr. Di Meo and Morgan Stanley were trying to
defeat that plan, Bloomberg notes. Moby cited in its suit a
recording of Mr. Di Meo that it obtained in which the investor
claims to have the bank's support, Bloomberg relays.
It's not clear how its U.S. claims might affect the timing of
Moby's proceedings in Italy, according to Bloomberg. The ferry
operator's restructuring plan had been scheduled for a vote at a
creditor meeting scheduled on Dec. 13, Bloomberg discloses.
The case is Moby SpA v. Morgan Stanley, 21-cv-8031, U.S. District
Court, Southern District of New York (Manhattan).
SAN MARINO: Fitch Affirms 'BB+' IDR & Alters Outlook to Stable
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Fitch Ratings has revised the Outlook on San Marino's Long-Term
Foreign-Currency Issuer Default Rating (IDR) to Stable from
Negative and affirmed the IDR at 'BB+'.
KEY RATING DRIVERS
The revision of the Outlook on San Marino's IDRs reflects the
following key rating drivers and their relative weights:
HIGH
San Marino's economy has demonstrated relative resilience to the
Covid-19 pandemic shock. Based on official preliminary estimates
(following the production approach), real GDP declined by 5.9% in
2020 and Fitch now expects a strong rebound of 5% in 2021 (up from
-8.8% and 4.5%, respectively, in Fitch's last review). The recovery
is mainly driven by the strong rebound in the tourism and
manufacturing sector (one-third of GDP) supported by faster growth
in San Marino's largest trading partner Italy (latest growth
forecast at 5.7% for 2021). These factors will also drive growth in
2022 and 2023, when Fitch expects the economy to expand by 3.5% and
2.5%, respectively.
San Marino's successful vaccination campaign allowed for a fast
reopening of the Sammarinese economy and its important tourism and
retail sectors in April/May this year. Tourist arrivals rebounded
strongly during the summer months, reaching pre-pandemic levels in
August. Fitch anticipates that 2021 tourism arrivals will remain
around 30% below their 2019 levels, following last year's decline
of 47%. The labour market has showed no signs of scarring, with
unemployment dropping to 6.5% in August (down from its peak value
of 9.2% in 2015). Fitch expects that unemployment will slightly
increase again towards the end of the year but remain below 7% by
year-end.
The resilience of the economy and prudent fiscal management support
an improved deficit and government debt trajectory. The fiscal
balance for 2020 reached 4.7% of GDP (April estimated deficit of
7.9%) despite higher than expected recapitalisation costs. The
government had to fully recapitalise state-owned bank CRSM's final
loss for 2020 of EUR26.9 million (2% of GDP), partly due to a
one-time guarantee payment. However, direct and indirect tax
revenues overperformed projections and expenditure growth net of
recapitalisation expenses remained modest at 5.1% yoy, reflecting
public sector wage containment and under-execution of the EUR100
million extraordinary fund to support the relaunch of the economy.
While some of this unrealised spending has been shifted to this
year, Fitch forecasts a deficit of 6.5% of GDP due a stronger
revenue growth and expenditures savings (including on the wage
supplement scheme). Fitch expects the deficit to narrow to 3.6% of
GDP in 2022 as the pandemic recedes. Authorities plan to introduce
reforms to the income tax and pension system in 2022, while the
timing of the VAT reform remains uncertain.
MEDIUM
Fitch now forecasts San Marino's government debt ratio to have
peaked in 2020 at 78% of GDP, up from 32% in 2019, due to the
conversion of EUR455 million assets relating to the guaranteed
legacy losses of CSRM into a coupon bearing perpetual bond, but
below Fitch's April estimate of 80%. Although government debt
remains significantly above the 'BB' peer median (59.1% at
end-2020), Fitch now projects debt to decline to 73% of GDP by
2025, roughly 7pp below Fitch's previous projection. Perpetual
bonds account for more than 40% of total government debt, with very
favourable interest rates and create no additional refinancing
risks for the government.
San Marino's large financial sector has so far demonstrated
resilience to the Covid-19 pandemic shock but structural challenges
persist. Liquidity positions improved in 1H21 due to an increase in
customer deposits and the government's early repayment of a EUR94
million zero-coupon bond held with CRSM. As a fully euroised
economy, the banking system lacks a credible lender of last resort
but a temporary EUR100 million repo line (2.3% of total banking
assets and close to 7% of GDP) with the ECB is in place until March
2022.
The authorities have also taken positive steps to begin to address
long-standing financial sector weaknesses. Following a loss
(excluding BNS) of EUR30 million in 2020, the sector's
profitability turned positive in 1H21. CRSM will no longer make
write-offs on its legacy losses and receive EUR8 million in annual
interest income from the perpetual bond, supporting the banking
sector's profitability. In addition, authorities have recently
enacted a new law to facilitate the reduction of non-performing
loans (NPL) through securitisation. Fitch notes that similar
schemes in Italy and Greece have proven highly successful but
uncertainty remains about the size of the government guarantee and
whether there is sufficient market demand for the securitised
assets (most of which are located in Italy). The central bank also
plans to implement new supervisory standards incentivizing a quick
write-down or sale of a significant amount of the NPLs to the
vehicle, following the ECB's Pillar 2 Supervisory Expectations
approach.
San Marino's 'BB+' IDRs also reflect the following key rating
drivers:-
San Marino's 'BB+' rating is supported by high wealth levels with
GDP per capita closer to the 'AAA' than the 'BB' median. The rating
also benefits from a resilient export sector and large net external
creditor position as well as a stable political system. The rating
is weighed down by a high debt burden and a large and weakly
capitalised banking sector. The very small size of the economy and
limited administrative capacity as well as data quality issues and
low growth potential are also key weaknesses
San Marino successfully accessed international capital markets for
the first time at the beginning of the year, issuing a three-year
EUR340 million Eurobond. While the external market issuance
supports San Marino's financing flexibility, it will increase
interest costs to 5.1% of government revenue in 2021 (including the
interest on the perpetual bonds and interest on a EUR150 million
short-term loan secured last year) from only 0.9% of revenue in
2019. Gross financing needs will rise sharply in 2024 when the
Eurobond matures. Therefore, maintaining international market
access will be important to reduce rollover risks.
Structural issues within the banking sector persist as the sector
undergoes deep restructuring and consolidation. Banks face weak
profitability amid a high cost base (cost-income ratio at 109.6% as
of end-2020) and a still high share of non-interest-generating
assets. Asset quality is very weak, with gross NPLs amounting to
60% of gross loans as of 1Q21 (35% net of write-downs) with the
majority of banking sector NPLs relating to CRSM. Capital ratios
have improved following a drop in 2019 and comply again with the
minimum capital requirement of 11%. However, they are significantly
behind the EU average of 17.1% as of 1Q21, according to data from
the European Banking Authority.
As full euroisation limits the central bank's ability to act as a
lender-of-last-resort, external buffers play a crucial role against
shocks. Foreign reserves are estimated to cover around 3.9 months
of current external payments by end-2021, up from 1.9 months
between 2015-2019 but below the 'BB' median of 5.2 months. The IMF
allocated an additional SDR47 million (roughly equivalent to USD66
million) to San Marino this year.
Fitch estimates that San Marino has a large net external creditor
position. Under Fitch's baseline scenario that includes sovereign
external borrowing, Fitch projects the external creditor position
to decline to 108.5% of GDP by 2023, from 134% in 2020, but to
remain stronger than peers. Fitch estimates a strengthening of the
current account surplus to 1.4% of GDP in 2021 (from an estimated
0.3% in 2020), as services exports recover from the pandemic and
the primary income balance weakens as cross-border workers return
to the workforce. Despite recent improvements, balance of payments
data remains incomplete and is only published with a significant
time lag.
ESG - Governance: San Marino has an ESG Relevance Score (RS) of
'5[+]' respectively for both Political Stability and Rights and for
the Rule of Law, Institutional and Regulatory Quality and Control
of Corruption. Theses scores reflect the high weight that the World
Bank Governance Indicators (WBGI) have in Fitch's proprietary
Sovereign Rating Model. San Marino has a high WBGI ranking at 71.2,
reflecting its long track record of stable and peaceful political
transitions, well established rights for participation in the
political process, strong institutional capacity, effective rule of
law and a low level of corruption.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Structural/Macro: Failure to address banking-sector
vulnerabilities in weak asset quality, low capitalisation,
continued losses and low liquidity that create risks for
financial stability and contingent liabilities for the
sovereign, and prevent banks from supporting the economic
recovery through increased lending.
-- Public Finance: Failure to place debt on a downward path over
the medium term, due to a sustained period of low growth or
inability to consolidate fiscal accounts, for example due to
failure to implement fiscal reforms.
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Structural Features: Continued progress in reducing banking
sector vulnerabilities, via a return to profitability and a
sustained improvement in asset quality, liquidity and capital
levels.
-- Public Finance: Increased confidence in the reduction of
public debt over the medium term, for example, through
stronger economic growth or fiscal consolidation.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns San Marino a score equivalent to a
rating of 'BBB-' on the Long-Term Foreign-Currency (LT FC) IDR
scale.
Fitch's sovereign rating committee adjusted the output from the SRM
score to arrive at the final LT FC IDR by applying its QO, relative
to SRM data and output, as follows:
-- Structural: -1 notch, to reflect that banking sector risks
remain high due to very weak asset quality from legacy NPLs
(60% of total gross loans), the risk that further state
recapitalisations of the sector will be required given large
NPLs adjusted for write-downs (34% of GDP), low capitalization
and liquidity levels, weak profitability and the absence of an
effective 'lender of last resort'.
Fitch's SRM is the agency's proprietary multiple regression rating
model that employs 18 variables based on three-year centred
averages, including one year of forecasts, to produce a score
equivalent to a LT FC IDR. Fitch's QO is a forward-looking
qualitative framework designed to allow for adjustment to the SRM
output to assign the final rating, reflecting factors within
Fitch's criteria that are not fully quantifiable and/or not fully
reflected in the SRM.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance
and Infrastructure issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in
a positive direction) of three notches over a three-year rating
horizon; and a worst-case rating downgrade scenario (defined as the
99th percentile of rating transitions, measured in a negative
direction) of three notches over three years. The complete span of
best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario
credit ratings are based on historical performance.
KEY ASSUMPTIONS
The global economy performs broadly in line with Fitch's latest
Global Economic Outlook published 16 September 2021.
SUMMARY OF DATA ADJUSTMENTS
The World Bank governance indicators are only available for two of
the six input factors for San Marino. For the remaining four input
factors, Fitch has used Italy's score as a proxy, with reasonable
confidence that the expected margin of error would not be
material.
ESG CONSIDERATIONS
San Marino has an ESG Relevance Score of '5[+]' for Political
Stability and Rights as World Bank Governance Indicators have the
highest weight in Fitch's SRM and are therefore highly relevant to
the rating and a key rating driver with a high weight. As San
Marino has a percentile rank above 50 for the respective Governance
Indicator, this has a positive impact on the credit profile.
San Marino has an ESG Relevance Score of '5[+]' for Rule of Law,
Institutional & Regulatory Quality and Control of Corruption as
World Bank Governance Indicators have the highest weight in Fitch's
SRM and are therefore highly relevant to the rating and are a key
rating driver with a high weight. As San Marino has a percentile
rank above 50 for the respective Governance Indicators, this has a
positive impact on the credit profile.
San Marino has an ESG Relevance Score of '4[+]' for Human Rights
and Political Freedoms as the Voice and Accountability pillar of
the World Bank Governance Indicators is relevant to the rating and
a rating driver. As San Marino has a percentile rank above 50 for
the respective Governance Indicator, this has a positive impact on
the credit profile.
San Marino has an ESG Relevance Score of '4[+]' for Creditor Rights
as willingness to service and repay debt is relevant to the rating
and is a rating driver for San Marino, as for all sovereigns. As
San Marino has track record of 20+ years without a restructuring of
public debt and captured in Fitch's SRM variable, this has a
positive impact on the credit profile.
Except for the matters discussed above, the highest level of ESG
credit relevance, if present, 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.
SHIBA BIDCO: S&P Assigns Preliminary 'B' ICR, Outlook Stable
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S&P Global Ratings assigned its preliminary 'B' long-term issuer
credit rating to Shiba Bidco SpA and its preliminary 'B' issue
rating, with a preliminary '3' recovery rating, to the company's
proposed EUR550 million senior secured notes.
The stable outlook reflects S&P's expectations that the combination
of Arcaplanet and Maxi Zoo Italy will reinforce the group's leading
position in the pet care retail market and facilitate profitability
improvement thanks to the planned synergies, translating to robust
free operating cash flow (FOCF) after leases in excess of EUR20
million in the next few years and an S&P Global Ratings-adjusted
debt to EBITDA of about 6.0x-6.5x in 2021 and 2022 (pro forma the
full consolidation of Maxi Zoo Italy).
The preliminary rating on Arcaplanet is constrained by the high
leverage upon transaction close.
On June 25, 2021, private equity fund Cinven and German industrial
group Fressnapf reached an agreement to acquire Arcaplanet from its
previous owners, private equity funds Permira and Winch Capital
Partners. S&P said, "We expect the transaction to close during
fourth-quarter 2021. Pro forma the transaction, Cinven will own 64%
of Arcaplanet, Fressnapf will own 33% (after accounting for the
Maxi Zoo asset contribution), and Arcaplanet's management will
retain 3%. To support the transaction, Arcaplanet holdco Shiba
Bidco SpA will issue EUR550 million senior secured notes to finance
its buyout and complete the Maxi Zoo acquisition. The holdco also
plans to issue an EUR80 million RCF, which will be undrawn at
transaction close. We note that the documentation underlying the
financial instruments is particularly permissive, given the absence
of financial covenants in the RCF and the generous permitted debt
basket in the offering memorandum. We view the Maxi Zoo acquisition
as transformative for Arcaplanet, leading to a significant increase
in its S&P Global Ratings-adjusted leverage to 6.3x (pro forma the
full consolidation of Maxi Zoo) in 2021, from our estimate of 3.5x
in 2020 for Arcaplanet on a stand-alone basis. We estimate total
adjusted debt of about EUR730 million, including EUR180 million of
lease liabilities. Equally, the group's unadjusted gross financial
leverage will reach 7.2x, reflecting the aggressive financial
strategy at closing, although the calculation incorporates our
adjustments to EBITDA, including the one-off costs associated with
the Maxi Zoo acquisition and integration."
S&P said, "The preliminary rating is underpinned by good cash flow
generation, a solid EBITDAR ratio, and our expectation that
Arcaplanet will focus on deleveraging, thanks to the conservative
financial policy. Despite the high unadjusted gross leverage at
closing, we expect FOCF generation to support the rating level,
thanks to a structurally near-zero working capital profile,
characterized by no seasonality, and discretionary capital
expenditure (capex) of about EUR33 million per year. We project
reported FOCF after finance leases of about EUR25 million-EUR30
million in 2021, followed by a reduction to about EUR20 million in
2022, before rebounding to about EUR45 million in 2023. The cash
flow reduction in 2022 is primarily due to the high capex needed to
complete construction of the dry food factory and expected
restructuring costs incurred to integrate Maxi Zoo operations. At
the same time, we project the EBITDAR coverage ratio to remain
stable, at about 2x, supporting good cash flow. The shareholder
agreement between Cinven and Fressnapf demands Fressnapf's approval
for, among others, any additional borrowings that would exceed the
leverage ratio at transaction close, corresponding to 6.5x in S&P
Global Ratings-adjusted terms. It also limits any dividend
distributions and debt-funded acquisitions, compensating somewhat
for the high starting leverage. We expect Cinven to adhere to this
conservative financial policy over the forecast period."
The acquisition of Maxi Zoo Italy will reinforce Arcaplanet's
leading position in the Italian pet care retail market, with
revenue of more than EUR460 million (pro-forma 2020) The scale of
the combined business will compare favorably with that of other
Italian pet care retailers, such as Isola dei Tesori, the second
largest player that generated 2020 revenue of about EUR140 million.
Both Arcaplanet and Maxi Zoo have shown steady, double-digit
topline growth over the past three years and they performed well
during the pandemic. Pet care stores were deemed essential
retailers by the Italian government and allowed to remain open
throughout various COVID-19 lockdowns. As a result, store footfall
suffered less than that of other specialty retailers, and reduced
traffic was compensated by an increase in e-commerce sales.
Changing attitudes toward pets and premiumization trends will
support double-digit revenue growth. The steady growth of the
Italian pet care market over the past five years has been driven by
a shift toward higher-value products, thanks primarily to secular
changes in customers' attitude toward their pets and an increasing
willingness to spend more to improve their living conditions.
Customers now research balanced feed--based on their pet's age,
size, breed, and lifestyle--and spend more on a diverse range of
products and services. These premiumization trends are well
embedded in Arcaplanet's value offering of exclusive brands, which
range from specialist to mass market. Arcaplanet derives about 45%
of revenue from the sale of exclusive brands, and Maxi Zoo about
50%. Therefore, S&P believes a similar or higher share will be
brought forward once the merger between the two companies is
completed.
Arcaplanet's integrated business model and brand awareness drive
above-average EBITDA margins.We expect Arcaplanet to continue
benefitting from a high S&P Global Ratings-adjusted EBITDA margin
of about 20%-22%. This is stronger than that of larger pet care
retailers and other specialty retailers operating in other
geographies and markets. Arcaplanet derives about 80% of its
earnings from food products, which makes it akin to a specialized
food retailer, with limited seasonality in earnings. In contrast to
traditional food retailers, its profitability is much higher and it
compares well to other publicly rated specialized food retailers,
such as Picard SAS or Euro Ethnic Food. Profitability is supported
by the high contribution of exclusive brands in revenue and gross
margins. S&P said, "In our view, the exclusive brand positioning
has been instrumental to building a strong image of quality pet
food and drives customer loyalty, while enabling strong cost
control. Moreover, we assess demand for specialized and premium
brands to be inelastic, since pricing is coupled to good quality
thanks to premiumization trends in the pet care market. We expect
profitability to improve once the dry food factory becomes
operational in late 2022 or early 2023. The future vertically
integrated business model will give Arcaplanet greater control over
the quality of its products and improve EBITDA margins."
The small scale of Arcaplanet's operations and a lack of
geographical diversification constrain the rating. Arcaplanet's
leading position in pet care retail could be challenged by
increased penetration from pure players in the Italian market, such
as Zooplus and Amazon, and by potential disruption from traditional
mass retailers, if they improve the quality of their private label
pet food. The limited scale of the company makes it vulnerable to
aggressive strategies from these competitors in the pet care retail
market. S&P said, "That said, we do not forecast increased
penetration from these players right now, due to logistical limits
in handling fresh pet food. Moreover, we believe Arcaplanet's
supply chain and expertise would help the company to navigate
changes in the competitive landscape in the medium-to-long term.
Our rating is also constrained by Arcaplanet's geographical
concentration, with 100% of revenue and EBITDA generated in Italy,
which we perceive as a drawback when compared to more diversified
pet care and specialist retailers." Nevertheless, the Italian pet
care retail market is still in a growth phase, when compared to
more mature markets, such as the U.S. of the U.K., and has
benefitted from significant tailwinds during the pandemic. More
than 80% of pet owners increased spending on pet food and products
during the pandemic and, as a result, the market expanded 4.6% in
2020.
Execution risks are partly mitigated by Arcaplanet's record of
previous acquisitions. S&P said, "We note that the group has
executed business integrations before, including smaller deals such
as Fortesan and Zoo Market, and that acquisitions are a fundamental
part of its strategy to increase market share. The transformational
acquisition of Maxi Zoo is Arcaplanet's largest deal so far. We
cannot rule out implementation risk, given the size of the
acquisition and the length of the integration project. Therefore,
we are taking a more conservative view on identified synergies
expected by the group. Arcaplanet aims to achieve about EUR20
million of synergies over 2022-2023. The majority will be cost
synergies, including cost-optimization initiatives such as the
integration of information technology infrastructure, headcount
reduction, and the removal of duplicate functions. We expect
limited improvement from the increased penetration of exclusive
brands, since we believe Arcaplanet will discontinue Maxi Zoo's
private labels."
S&P said, "The final rating will depend on our receipt and
satisfactory review of all final documentation and terms of the
transaction.The preliminary ratings should therefore not be
construed as evidence of final ratings. If we do not receive final
documentation within a reasonable time, or if the final
documentation and final terms of the transaction depart from the
materials and terms reviewed, we reserve the right to withdraw or
revise the ratings. Potential changes include, but are not limited
to, utilization of the proceeds, maturity, size and conditions of
the facilities, financial and other covenants, security, and
ranking.
"The stable outlook reflects our expectations that Arcaplanet will
acquire Maxi Zoo Italy, achieve synergies within the planned
budget, complete its new production facility and continue to
materially increase its sales and EBITDA, ultimately benefitting
from a solid market position in the pet care retailing industry. We
forecast S&P Global Ratings-adjusted leverage at 6.3x-6.5x and
positive FOCF after leases in excess of EUR20 million for both 2021
and 2022, before a significant improvement in credit metrics thanks
to the realization of synergies and EBITDA growth.
"We also expect Arcaplanet to undertake sustained deleveraging
thanks to the agreement between the shareholders, indicating a
maximum leverage target and restricting dividend distributions and
debt-funded acquisitions."
S&P could lower its rating over the next 12 months if Arcaplanet
underperforms its base case and its operating performance weakens.
This could happen due to:
-- Integration challenges, such as delays in achieving synergies
and higher-than-anticipated integration costs;
-- Weaker macroeconomic conditions, due to a more prolonged and
severe impact from the pandemic; or
-- Increased competition that erodes Arcaplanet's market position,
coming in particular from online pure players and traditional mass
retailers.
This would translate into S&P Global Ratings-adjusted leverage
increasing above 6.5x and negative FOCF by year-end 2022. S&P could
also lower the ratings if the company undertakes debt-funded
acquisitions or dividend distributions, resulting in elevated
leverage ratios (both adjusted and unadjusted) or a weaker
liquidity position.
Although an upgrade is remote over the next 12 months, S&P could
raise its rating if Arcaplanet outperforms its current base case by
integrating Maxi Zoo Italy faster than expected, delivering
synergies, and increasing its EBITDA and FOCF, such that S&P Global
Ratings-adjusted debt to EBITDA declines below 5x and FOCF to debt
increases beyond 8% on a sustainable basis.
Any upgrade would be dependent on a clear commitment not to
releverage the business to current levels.
SPORT MANAGEMENT: Oct. 11 Deadline Set for Business Unit Offers
---------------------------------------------------------------
Dr. Federico Cracco and Dr. Erik Rambaldini, the Judicial
Commissioners of Sport Management SpA, announced that the the Court
of Verona, has arranged for the opening of a competitive tender
pursuant to art. 163-bis Italian Bankruptcy law for the transfer of
the company's Business Unit.
The Business Unit is made up of a series of tangible and intangible
goods organized for the management of Public Sports and Swimming
centres located in: (1) Alpignato (TO); (2) Brugherio (MB); (3)
Busto Arsizio (VA); (4) Cameri (NO); (5) Cantu (CO); (6)
Carpenedolo (BS); (7) Cesena (PC); (8) Crema (CR); (9) Cremona;
(10) Desenzano del Garda (BS); (11) Luino (VA); (12) Mantova; (13)
Montecchio Maggiore (VI); (14) Novara; (15) Porto Mantovano (MN);
(16) Rimini; (17) Thiene (VI); (18) Verona - via Santini; (19)
Milan - via Viterbo (Share quota in Temporary Consortium).
With facilities, equipment, interior decor, machinery, furniture
and office equipment currently present at the sports and swimming
centres managed by Sport Management and included in the Business
Unit, which contribute to the formation of the company's assets, in
addition to any authorizations, licenses, permits and/or
administrative provisions useful and/or required for the operation
of this Business Unit.
The minimum purchase price is set at EUR1,500,000 in addition to
further economic conditions, additional and comulative compared to
the Business Unit purchase price. All of which in addition to
legal taxes and dues, transfer costs, including the fees owed to
the appointed Notary, all charged entirely to the purchasing
party.
The offers for a price of at least equal to or greater than the
minimum price, must be delivered to the Bankruptcy Chancellor's
Office of the Court of Verona in a sealed envelope containing on
the outside the inscription "Tribunale di Verona - Concordato n.
12/2021 - offerta di acquisto Ramo d' Azienda". The offer must be
qualified as irrevocable. The offer must be delivered by noon on
October 11, 2021.
The examination of the offers received will take place before the
Bankruptcy Judge at the premises of the Criminal and Civil Court of
Verona in the presence of applicants on October 11, 2021 at 2:30
p.m.
Given the complexity of the sale conditions, any further details
may be obtained from the decree initiating the tender procedure
published on the Public Sale Portal and on the site
www.tribunale.verona.giustizia.it
Any additional information may be obtained by contacting the
Judicial Commissioners at cp12.2021verona@pecconcordati.it.
ZONCOLAN BIDCO: Moody's Assigns First Time B2 Corp. Family Rating
-----------------------------------------------------------------
Moody's Investors Service has assigned a first-time B2 corporate
family rating and a B2-PD probability of default rating to Zoncolan
Bidco S.p.A ("EOLO" or "the company"). Concurrently, Moody's has
assigned a B3 rating to the EUR375 million senior secured notes due
in 2028 issued by Zoncolan Bidco S.p.A. The outlook is stable.
On July 17, 2021, Partners Group, a leading global private markets
firm, acting on behalf of its clients, agreed to acquire a 75%
stake in EOLO S.p.A for an enterprise value of approximately EUR1.3
billion (calculated for the entire 100%). Partners Group will
acquire the 75% stake in EOLO from Searchlight Capital Partners, a
vehicle controlled by Luca Spada, EOLO's founder and Chief
Executive Officer. The remaining 25% will be owned by the vehicle
controlled by Luca Spada, who will continue to act as EOLO's CEO.
The transaction is expected to be completed by the end of 2021 and
will be funded through a combination of EUR910 million of
shareholder funding (EUR683 million for the 75% stake) including
EUR182 million of equity and EUR728 million of deeply subordinated
shareholder loans, and the EUR375 million senior secured notes. The
capital structure will also include a EUR125 million super senior
secured revolving credit facility ("SSRCF") maturing in 6.5 years.
"EOLO's B2 rating reflects the supportive fundamentals of the
Italian fixed wireless access ("FWA") market, EOLO's strong
position in this segment and its solid track record of growth,"
says Ernesto Bisagno, a Moody's Vice President -- Senior Credit
Officer and lead analyst for EOLO.
"However, the rating also factors in EOLO's modest scale and niche
business focus, the exposure to technology risk, as well as its
negative free cash flow after growth capex," adds Mr. Bisagno
RATINGS RATIONALE
The B2 CFR reflects (1) the supportive fundamentals of the Italian
FWA market given the relatively low penetration of fiber in rural
areas and the orography of the country; (2) EOLO's strong position
in this segment; (3) its well invested infrastructure, increasing
customer base and modest churn rate; (4) its track record of strong
revenue growth and high EBITDA margin (as adjusted by Moody's); and
(5) the material proportion of shareholder funding (around 70%) in
EOLO's takeover.
The rating also reflects (1) EOLO's modest scale and niche business
focus; (2) the exposure to technology risk; (3) the potential for
increase in competition from other telecom service providers in
Italy; (4) the extension risk of the existing spectrum licenses;
(5) the high operating leverage owing to a high proportion of fixed
costs; (6) the negative FCF generation after growth capex; and (7)
its moderate leverage of around 4.5x.
EOLO reported stronger revenue growth over 2019-21 mainly driven by
a material increase in the customer base, and to a lower extent, to
modest ARPU improvement.
Although the company's Moody's adjusted EBITDA margin is high at
around 50% at June 21, free cash flow (FCF) remained negative due
to the significant capex spend. Nevertheless, cash flow before
growth capex was positive and improved over 2019-21.
Moody's notes that the company's EBITDA calculation reflects the
capitalization of network systems and customer premises equipment
(CPE) costs, which are amortized over the useful life of the
underlying assets. However, operating margins are significantly
lower, in the low-mid-single digit range, resulting in a weak EBIT
to interest expense ratio.
Moody's expects EOLO to report strong revenue growth of around
10%-15% each year, driven by the increase in customer base and
stable ARPUs. The rating agency anticipates EBITDA to grow faster
than revenue given the positive impact from operating leverage.
Despite stronger EBITDA, Moody's adjusted FCF will remain negative
over 2022-23 at about EUR25 million - EUR35 million each year, due
to a combination of high growth capex and the cash outflow
associated with spectrum extension. From 2024 onwards, FCF will
improve driven by a moderation in capex and ongoing earnings
improvement. As a result, Moody's adjusted debt to EBITDA should
remain at around 4.5x over 2022-23, and decrease towards 4.0x by
2024.
While the FWA technology is currently competing well against the
other mobile and fixed technologies, EOLO operates in a competitive
market and remains exposed to technology risk which mainly reflects
potential increased competition from FTTH.
The 26GHz and 28GHz licenses originally awarded to EOLO in 2014 and
2018 will expire in December 2022, expose EOLO to license extension
risks. However, EOLO has already submitted the request for the
extension of its licenses and indicated it should receive the
approval by the beginning of the next year. Based on precedents,
Moody's expects that those licenses will be extended till 2029, and
assume a 30% increase for the 28GHz, versus the original price.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
Moody's has factored into its decision to assign a B2 rating to
EOLO the governance considerations associated with the company's
financial strategy and risk management, as well as its concentrated
ownership. The proposed capital structure includes a material
equity component covering around two thirds of the total
consideration, which suggests a balanced financial policy.
However, the company will be controlled by Partners Group, which,
as is often the case in highly levered, private-equity-sponsored
deals, could have a high tolerance for leverage. This is mitigated
by the good revenue visibility and the fact that a material part of
the capex programme includes growth (success-based) capex and could
be curtailed if needed.
LIQUIDITY
EOLO's liquidity is adequate, with an initial cash balance of EUR41
million and access to a EUR125 million revolving credit facility
maturing in 6.5 years with no financial covenants. However, because
of the significant growth capex and the spectrum payment, Moody's
expects the company to generate modest negative FCF between EUR25
million and EUR35 million each year over 2022-23, which will be
funded through cash available on balance sheet and RCF
utilization.
STRUCTURAL CONSIDERATIONS
The B3 rating of the senior secured notes is one notch below the
CFR, reflecting its ranking behind the SSRCF, which has priority
over the proceeds in an enforcement scenario under the
Intercreditor Agreement.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that EOLO will
continue to grow its revenues and earnings overtime and assumes
that the company will be able to mitigate a potential increase in
competition through a solid customer service proposition and
ongoing technology upgrades.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure in the next 12-18 months is unlikely but
could develop if the company successfully delivers on its business
plan, showing strong revenue growth as well as a sustainable
improvement in EBITDA margins. Quantitatively, that would require
Moody's adjusted debt/EBITDA to reduce towards 3.5x and Moody's
adjusted free cash flow (FCF) turning positive.
Downward pressure on the ratings could develop if operating
performance starts deteriorating, with Moody's adjusted debt/EBITDA
increasing above 5.0x; if liquidity weakens; or if the company
failed to extend the spectrum licenses.
LIST OF AFFECTED RATINGS
Issuer: Zoncolan Bidco S.p.A.
Probability of Default Rating, Assigned B2-PD
LT Corporate Family Rating, Assigned B2
Senior Secured Regular Bond/Debenture, Assigned B3
Outlook Actions:
Outlook, Assigned Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was
Telecommunications Service Providers published in January 2017.
COMPANY PROFILE
Headquartered in Busto Arsizio (Italy), EOLO is a national
telecommunications operator and market leader in the supply of
ultra-broadband FWA services to the residential, business and
wholesale sectors in Italy. EOLO offers FWA services in rural and
suburban areas in Italy for residential and wholesale customers
with speeds ranging from up to 30 Mbps in the basic package to
100Mbps in the premium package.
===================
L U X E M B O U R G
===================
CULLINAN HOLDCO: S&P Assigns Preliminary 'B+' ICR, Outlook Stable
-----------------------------------------------------------------
S&P Global Ratings assigned its preliminary 'B+' long-term issuer
credit rating to Cullinan Holdco and preliminary 'B+' issue rating
to the EUR600 million bond.
Cullinan Holdco has acquired AS Graanul Invest, an Estonia-based
wood pellet producer, and plans to issue a senior secured EUR600
million five-year bond to finance the acquisition in addition to
entering into a new super senior revolving credit facility (RCF).
Apollo Global Management has acquired an 80% stake in Graanul.
Cullinan, the newly formed entity, plans to issue a EUR600 million
bond to partly finance the leveraged buyout. An equity injection
from the owners will finance the remainder. S&P said, "We forecast
EBITDA of EUR130 million-EUR160 million annually, and free
operating cash flow (FOCF) of EUR70 million-EUR80 million,
indicating robust FOCF to debt of 11%-13% during 2021-2023. This is
thanks to an EBITDA margin that is stronger than peers' and limited
annual capex plans of EUR30 million. We anticipate, however, that
the healthy cash flow generation could be consumed by shareholder
remuneration, and therefore potentially not lead to any meaningful
debt reduction. We believe the owner will use shareholder
remuneration to balance leverage. We expect S&P Global
Ratings-adjusted debt to EBITDA will be below 5.0x in 2021 and
decrease to about 4.0x thereafter, in accordance with the company's
financial policy."
S&P said, "We believe that Apollo Global Management will balance
shareholder remunerations with leverage below 4.5x. Cullinan is
majority owned by private equity company and financial sponsor
Apollo Global Management. We are assigning a financial sponsor
classification of FS-5, because Apollo Global Management has
clearly stated it has no plans to increase debt to EBITDA above
4.5x over the next three years." This includes no plans for any
shareholder loans, payment-in-kind (PIK) loans, preferred equity
certificates (PECs), preference shares, or other instruments that
S&P Global Ratings typically treats as debt to Cullinan's capital
structure.
Growth in the wood pellet industry should support production
increases in the near term, but government policies on biomass
remain an uncertainty. Cullinan has increased its production to
almost 3.0 million mt during 2021 from 0.4 mt during 2011. The
demand for wood pellets increased significantly to almost 20
million mt during 2020 from about 1.5 million mt in 2003. S&P
expects demand for wood pellets will remain healthy in the short
term, underpinned by policies shifting away from fossil production
but at a more moderate speed than in the past decade.
S&P said, "As a result, we believe that the company will continue
to ramp up production and volumes in the next five years, with an
annual compound growth rate of about 6% over 2021-2026. While lower
than historical growth of 11%, this should allow Cullinan to
sustain its top-three global position among wood pellet producers
while increasing the gap with other players and strengthening its
position against its largest competitor, U.S. based Enviva
Partners. Enviva has more than doubled Cullinan's production
capacity, with annual production capacity of 6.2 million mt, with
exports to Europe currently representing more than 50%."
That said, the medium-to-long term longevity for biomass and wood
pellets could depend on the EU taxonomy view on biomass. This
creates a long-term risk for Cullinan for its wood pellets demand,
because if the result is unfavorable toward biomass, it could
result in power generators halting their use of biomass and thereby
lower overall demand.
Cullinan also owns six combined heat and power plants that generate
about 340 gigawatt hours annually. S&P said, "We view this as
positive, because it lowers margins and risk of inflating costs
from heating and electricity needs for its wood pellet production.
We expect Cullinan to maintain its EBITDA margin at about 28%-30%,
above Enviva's 20%-22%, with a gradual increase of annual EBITDA
toward EUR180 million by 2025, up from to EUR120 million during
2020."
High customer concentration risk is balanced by strong customer
relations, a strong market position, and a high customer renewal
rate. Cullinan's two-largest customers represent almost 80% of
annual volumes sold and the top-five customers contribute almost
95% of revenue. S&Ps aid, "We view this as a high concentration
risk, because high customer concentration entails certain event
risks. The risk is somewhat mitigated by a long track record of
renewals: Many of its customer relationships have been in place for
over 10 years, with proactive contract renewals. Additionally,
Cullinan has strong, legally binding take-or-pay contracts with all
customers that lock in prices and volumes. Weighted average
contract length is about five years, which is shorter than Enviva's
about 10 years, which in our view, results in a slightly stronger
business risk for Enviva than Cullinan." Longer contracts usually
bring predictable revenue and cash flow, but could also add
inflation risk as underlying costs (such as raw material,
electricity and shipping) could increase more than expected and
therefore affect margins.
Cullinan's production volumes for the remainder of 2021 are almost
fully contracted, about 75% is contracted for 2022, and 45% is
under contract for 2023 and 2024. One of its larger contracts is
due in 2027, which represents about 30% of annual volumes. S&P
said, "We understand that Cullinan aims to contract about 80% of
annual production, and to sell the remaining 20% of produced
volumes on the spot market. We believe that this gives the company
flexibility in production, but also the possibility to sell
additional volumes to its customers."
S&P said, "We anticipate the production increase will likely be met
by capacity increases in existing plants, or a small acquisition.
We understand that the company would not increase capacity
aggressively, meaning without contracted sales. In our base case,
we include annual capex of about EUR30 million, of which EUR25
million would be dedicated to growth capex, but is not committed at
this stage. The remaining capex relates to maintenance.
"The final ratings will depend on our receipt and satisfactory
review of all transaction documentation. Accordingly, the
preliminary ratings should not be construed as evidence of final
ratings. If S&P Global Ratings does not receive final documentation
within a reasonable time frame, or if final documentation departs
from materials reviewed, we reserve the right to withdraw or revise
our ratings. Potential changes include, but are not limited to,
utilization of loan proceeds, maturity, size and conditions of the
term loan, financial and other covenants, security, and ranking.
"The stable outlook reflects our view that Cullinan will continue
renewing its contracts with favorable pricing while expanding its
operations to new markets under favorable regulation. We expect an
only modest increase in leverage from shareholder remuneration,
implying debt to EBITDA will remain at 4.0x-4.5x."
S&P could lower the rating if:
-- Cullinan fails to renew its expiring contracts or cannot
successfully replace unrenewed contracts with new ones, or if
demand is weaker than expected, for example if the EU taxonomy
doesn't favorably include biomass.
-- Failure to pass on production cost increases, resulting in
lower EBITDA margins and cash flow than assumed or that is not
offset by other measures.
-- Debt to EBITDA increases above 5x. This could happen, for
example, if Cullinan makes an acquisition, or pays larger
shareholder remuneration than expected.
-- S&P said, "Introduction of any other instruments to the
structure, such as shareholder loans, PIK loans, PECs, or other
instruments that we view as debt and which would imply increased
leverage. We would likely see that as an aggressive change of the
financial policy, which would most likely lead us to reassess the
financial policy."
-- S&P sees a positive rating action as remote because of
Cullinan's limited size and concentration risk toward a few
customers. Additionally, the rating is also constrained by our view
of its financial sponsor.
S&P could however upgrade Cullinan if:
-- The business diversifies and increases significantly, without
affecting operating margins.
-- S&P sees further evidence, and some track record, of the
sponsor pursuing a conservative financial policy.
-- A substantially longer contract structure of closer to 10
years.
===========
R U S S I A
===========
SAMARA OBLAST: S&P Alters Outlook to Pos. & Affirms 'BB+' LT ICR
----------------------------------------------------------------
S&P Global Ratings revised its outlook on Russia's Samara Oblast to
positive from stable. At the same time, S&P affirmed its 'BB+'
long-term issuer credit rating on the region and its 'BB+' issue
rating on the oblast's senior unsecured bonds.
Outlook
The positive outlook reflects S&P's expectation that the projected
economic recovery and continuing significant transfers from the
central government will contain the annual budget deficit after
capital accounts to less than 5% of total revenue in the next 12
months, keeping debt low and the liquidity position robust.
Upside scenario
S&P could raise the rating in the next 12 months if federal
transfers remained high enough for Samara Oblast to maintain
consistently sound budgetary performance and a solid liquidity
position.
Downside scenario
S&P could revise the outlook to stable in that time if the oblast's
management relaxed its financial policies with regard to
expenditure, allowing operating spending to accelerate and
budgetary performance indicators to deteriorate significantly.
Rationale
S&P said, "We have revised upward our assessment of Samara Oblast's
debt burden following the improved financial performance. The
oblast reported surpluses after capital accounts over the past four
years and we project only minor deficits in 2021-2023. We think
that strong performance, supported by federal transfers and steady
revenue growth, will allow the region to keep its tax-supported
debt below 30% of consolidated operating revenue through 2023. We
also believe that Samara Oblast will retain its sound liquidity
position, owing to the accumulated cash reserves and its regular
presence on the bond market." The volatility of the institutional
framework under which Russian regions operate, the local economy's
relatively low wealth, and a high dependence on the central
government's decisions continue to constrict the ratings on the
oblast.
A centralized institutional framework continues to constrain the
ratings
Under Russia's volatile and unbalanced institutional framework,
Samara Oblast's budgetary performance is significantly affected by
the federal government's decisions regarding key taxes, transfers,
and expenditure responsibilities. S&P estimates that federally
regulated revenue will continue to make up more than 95% of the
oblast's budget revenue, which leaves very little revenue autonomy
for the region. The application of the consolidated taxpayer group,
the tax payment scheme used by corporate taxpayers since 2012,
continues to undermine the predictability of corporate profit tax
payments.
Samara Oblast is one of Russia's key industrial regions. Still, the
wealth level as measured by local GDP per capita is modest. S&P
said, "We forecast it will be near $7,500 in 2021-2023, versus the
national average of $12,000. Furthermore, we believe revenue
remains exposed to tax changes for the oil production and refining
industry. However, in our view, the oblast's tax base is less
concentrated than that of Russian peers, which are more exposed to
commodity and mineral-extraction activities."
In S&P's view, Samara Oblast has sufficient flexibility to balance
its budget in case of a revenue shortfall. Its financial management
has a strong track record of cost control. However, similar to most
national peers, the region lacks reliable medium-to-long-term
financial planning and mechanisms to counterbalance tax revenue
volatility.
The deficit after capital accounts will likely remain low over
2021-2023, owing to continuing support through central government
transfers
S&P said, "We believe that the budgetary performance will remain
strong over 2021-2023 and will be supported by the transfers from
the central government and tax revenue growth. We expect tax
revenue to increase, on stronger manufacturing and food-processing
industries, and larger tax contributions from domestically oriented
oil production and refining companies. At the same time, we believe
the oblast could experience pressure on expenditure from the need
to finance increasing social spending.
"We anticipate that capital expenditure will increase due to
national development projects announced by the Russian president in
2018, although additional earmarked transfers from the central
government will compensate for this. We estimate that about 65% of
capital expenditure will be co-financed by the central government.
"In our view, the modest deficits will result in tax-supported debt
at below 30% of consolidated operating revenue through 2023, which
we view as low. The debt of government-related entities (GREs)
doesn't constitute a major burden for Samara Oblast. The oblast's
administration continues to reduce its presence in the local
economy by privatizing GREs. We therefore don't expect any
significant extraordinary support from the oblast budget to its
GREs.
"We anticipate that modest deficits, accumulated cash holdings, and
a smooth debt repayment schedule will allow Samara Oblast to
maintain sufficient liquidity coverage. We consider that the
oblast's cash will cover debt service of about Russian ruble 10
billion by more than 100% over the next 12 months. We believe that
Samara Oblast will continue to tap the bond market over 2022-2023.
The oblast enjoys a smooth repayment schedule with evenly spread
maturities. We also believe that it has satisfactory access to
external liquidity, given its regular presence in the Russian bond
market and proven track record of obtaining financing even when
market conditions are tight."
In accordance with S&P's relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable. At the onset of the committee, the chair confirmed that
the information provided to the Rating Committee by the primary
analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
RATINGS AFFIRMED; OUTLOOK ACTION
To From
SAMARA OBLAST
Issuer Credit Rating BB+/Positive/-- BB+/Stable/--
RATINGS AFFIRMED
SAMARA OBLAST
Senior Unsecured BB+
===============
S L O V A K I A
===============
CONING: Slovakian Acquisition of Hotel Trakoscan in Final Phases
----------------------------------------------------------------
Lauren Simmonds at Total Croatia News reports that the Slovakian
acquisition of Hotel Trakoscan in continental Croatia has finally
reached its final phases, one step closer to the company taking
full possession of the facility.
According to Total Croatia News, as Poslovni Dnevnik/Suzana
Varosanec writes, two of the three large tourism components from
the bankruptcy estate of Varazdin's Coning, which were sold as part
of this bankruptcy procedure, can be said to have ended up in the
portfolio of the same buyer, the Zagreb company Adriatic Tourist
Resorts, owned by JS Capital Management from Bratislava, Slovakia.
The Zelena punta apartment complex (Kukljica) on the island of
Ugljan, has already been taken over by ATR for around HRK26.5
million, and now the same is about to unfold for Hotel Trakoscan,
while possible Slovakian interest in Hotel Pagus is currently
unknown, Total Croatia News discloses. However, according to the
latest AFS, ATR wrote off investments close to HRK2 million for the
purchase of the Pagus hotel, which failed to materialize in the
end, Total Croatia News notes.
In total, the Kukljica apartment complex was estimated to stand at
HRK37.57 million, while the estimated value for Hotel Trakoscan and
the surrounding land was HRK55.27 million, Total Croatia News
states.
Currently, the acquisition of Hotel Trakoscan is in its final phase
and the company in question is one step closer to taking
possession, with this very attractive piece of real estate being
accompanied by the necessary form of establishing a lien due to the
closure of financing from the new owner -- through a loan,
according to Total Croatia News.
The buyer of ATR, Coning's creditor, is financing the purchase of
Hotel Trakoscan with credit funds, and the loan was obtained from
the Slovak company Prime Tourist Resorts, which in mid-2020
transferred its stake to JS Capital Management, Total Croatia News
states.
After the hotel was awarded in favour of ATR for a massive price
tag of HRK29.055 million, ie, after the appeal procedure initiated
by the buyer to resolve the issue of the difference for which they
were exempted from paying the purchase price, the amount of
HRK27.855 million realised through a Slovak loan was finally
confirmed, Total Croatia News discloses.
As a result, a contract on the establishment of a lien on the
aforementioned property and its surrounding land has been concluded
over recent days, the Varazdin Commercial Court announced, Total
Croatia News notes.
In the bankruptcy of the Varazdin company Coning, sales for Hotel
Pagus are still expected to continue, with a value estimated at
HRK45.87 million, while the conclusion on the sale sets an initial
value of HRK49 million, Total Croatia News states.
=========
S P A I N
=========
GRIFOLS SA: Fitch Assigns Final B+ Rating on Unsecured Notes
------------------------------------------------------------
Fitch Ratings has assigned Grifols, S.A.'s (Grifols) senior
unsecured notes a final instrument rating of 'B+'/'RR5. The notes
were initially issued by Grifols Escrow Issuer, S.A.U. and will be
transferred to Grifols once the acquisition of Biotest AG (Biotest)
is complete.
The final rating follows the pricing of the notes and receipt of
final documentation that was substantively in line with the draft
documentation received when originally assigning the expected
ratings.
Grifols' 'BB-' IDR reflects its strong business profile,
underpinned by sizeable cost-efficient operations, leading global
market positions across its core plasma-derived medical products
and healthy operating and cash flow margins. However, the IDR is
constrained by high financial leverage, given aggressive financial
policies and the debt-funded expansion strategy.
The Stable Outlook reflects Fitch's expectation of fast
deleveraging in 2023 and 2024 following very high leverage in 2021
and 2022 due to a temporary pandemic-driven hit to operating
performance and the acquisition of Biotest AG. Fitch models
restoration of leverage from a pandemic-disrupted funds from
operations (FFO) net leverage around 8.5x in 2021 towards 5.0x in
2024. This will be supported by a conservative financial policy
combined with a well-executed integration of Biotest leading to new
product launches and operating synergies, against a backdrop of
receding pandemic pressures.
The 'B+(EXP)/'RR5' rating assigned to the new senior unsecured
notes at Grifols has been withdrawn due to changes in the group
structure as the notes were initially issued by Grifols Escrow
Issuer, S.A.U., an SPV entity, which upon completion of the
acquisition of Biotest will be merged into Grifols and cease to
exist.
KEY RATING DRIVERS
Leading Player in Attractive Niche: The rating reflects Grifols'
top three position in the oligopolistic plasma-derivatives market,
a fast-growing market estimated to grow at 8%-9% a year driven by
positive structural trends such as the increased use of plasma
derivatives for the manufacturing of biologic drugs for existing
and new indications. The plasma derivatives market benefits from
barriers to entry due to the complex and highly regulated
collection, handling and processing of plasma, the importance of
scale given the sector's high capital intensity, as well as
reliable access to human blood plasma, the key raw material.
At the same time, compared with innovative pharmaceuticals, this
niche is more exposed to cost and price pressure given the
chronically undersupplied plasma market and little product
differentiation between manufacturers of plasma-derived medicines,
with intellectual property protection of less relevance. As one of
the larger sector constituents, Grifols is well placed to defend
its competitive market position through its vertical integration
securing plasma supply and running cost-efficient operations.
No Rating Headroom, Financial Policy Key: Fitch views a lack of
financial discipline and deviation from the current commitment to
deleveraging as key risks to the 'BB-' IDR as the current financial
leverage is not aligned with the rating, with no rating headroom.
However, the Stable Outlook reflects Fitch's deleveraging
assumptions, relying on the company's public commitment to achieve
reported net debt/EBITDA target leverage of 4.0x by 2023, which
corresponds to Fitch's FFO net leverage between 5.0x and 5.5x
(appropriate for Grifols' 'BB-' rating). Fitch does not expect
Grifols to make any large asset disposals to repay debt, despite
having the capacity to do so.
Instead, Fitch estimates deleveraging will come from a combination
of organic EBITDA growth, stemming particularly from new product
launches in 2023/2024, and the company's commitment to abstaining
from shareholder distributions and larger scale M&A.
Persistently Weak Leverage: Grifols has historically maintained
persistently weak leverage, reflecting its aggressive financial
policy, with FFO net leverage fluctuating between 5.0x and 5.5x.
However, Fitch expects pandemic-related operating underperformance
in 2021-2022 and the debt-financed EUR2 billion acquisition of
Biotest to lead to FFO net leverage around 8.5x, which is excessive
for the rating. Fitch views this leverage level as temporary and
expect a recovery in performance in 2023 and 2024, as plasma
availability improves and Grifols can benefit from increased
capacity utilisation levels, further supported by new product
launches and Biotest integration synergies.
Deleveraging will have to be supported by corporate actions around
capital allocation and shareholder distributions in line with the
communicated policies by the company to investors. Fitch projects
that FFO net leverage will improve to around 5.5x by 2023, which is
high, but can be accommodated by Grifols' strengthened business
profile following the acquisition.
Plasma Shortage Affect Margins Through 2022: Fitch expects that
Grifols' EBITDA margins will materially decline to about 20% in
2021 and 2022 against pre-pandemic levels of 26%-27%. Mobility
restrictions and reduced blood donation activity during the
pandemic have further exacerbated a plasma shortage in an already
undersupplied market, and have led to increased input prices and
lower capacity utilisation levels. In Fitch's view, temporary
supply dislocation will affect Grifols' operating profitability
until end-2022, given the lag between plasma procurement and
product sale of up to 12 months.
Fitch estimates that recovering plasma collection volumes seen this
year in the US and Europe will ease the price situation. Together
with increasing processing volumes, this will support profitability
normalisation from 2023, given the commodity nature of plasma riven
by supply/demand dynamics.
Timely Integration, Product Launches Critical: The timely
integration of Biotest with new product launches from 2023 and the
full achievement of operating synergies are critical to a
structural EBITDA margin improvement towards 30% (Fitch-defined,
excluding IFRS 16) from the pre-pandemic level of 27%, driving
deleveraging.
The transaction has compelling industrial logic, particularly as
Grifols will gain access to Biotest's two late-stage plasma
proteins with complementary research competencies, in addition to
extending its plasma collection network and manufacturing capacity
in the attractive German market. Fitch regards integration risk as
manageable, supported by the cultural fit and business model
commonalities between the two companies, and Grifols' record of
inorganic growth management.
Healthy FCF: The rating reflects Grifols' intrinsic cash-generative
profile, excluding the impact of the pandemic, with mid-to-high
single-digit free cash flow (FCF) margins (low teens before
dividends). This counters its levered balance sheet and sets the
company apart from the lower-rated sector constituents, which Fitch
has captured in the rating sensitivities. The inability to maintain
this FCF profile from 2023 would signal weakening business quality
and together with Grifols' already stretched financial leverage,
would no longer support the 'BB-' IDR.
GIC Transaction Leverage Neutral: Fitch treats the pending disposal
of a 23.8% minority stake in Grifols' US-based blood collection
subsidiary Biomat to the Government of Singapore Investment
Corporation (GIC) as neutral to leverage, given the debt-like
features of its contractual terms and structural seniority to the
group debt issued at the parent and main operating subsidiaries
level.
Volatile Plasma Sourcing: The pandemic has highlighted the
sensitivity of Grifols' operations to plasma supply economics. The
main factor influencing plasma availability is the national policy
on donation and economic incentives for blood donors. The US is the
largest plasma market, with plasma exported globally. Europe
currently imports about 60% of its plasma (37% from the US), with
four European countries (Austria, Czech Republic, Germany, and
Hungary) contributing more than 55% of the total amount of plasma
collected within Europe.
These countries allow the coexistence of public and privately-owned
collection centres and compensate donors for expense and
inconvenience related to the donation. National policy changes
incentivising blood donation could resolve plasma shortages. Rising
plasma demand and lack of improvement on plasma collection policies
will remain a sensitive topic and may lead to declining margins in
the long term for manufacturers of plasma-derived medicines.
Concentrated Portfolio, M&A Improves Business Risk: In Fitch's
view, Grifols remains a medium-sized pharmaceutical firm with a
concentrated product portfolio (about 80% of revenue and EBITDA
generated from plasma derivatives) and high exposure to the US
market (about 70% of revenue). The transformational acquisition of
Biotest will primarily strengthen Grifols' product pipeline and
innovation capabilities, in addition to broadening its scale and
geographic footprint, boosting revenue and cost synergies.
At the same time, Grifols' business risk has improved following
numerous acquisitions of businesses and production assets,
evidenced in its high operating and cash flow margins for the
sector.
DERIVATION SUMMARY
Fitch rates Grifols using the framework laid out in
Pharmaceuticals: Ratings Navigator Companion.
Grifols stands out as one of the most sizeable sector issuers in
the non-investment-grade space, with a compelling business model in
terms of global market position in core products, strong operating
profitability and strong FCF generation, albeit a heavy reliance on
the performance of plasma-derivatives accounting for around 80% of
its sales. Its financial risk is the main rating constraint, with
sustained FFO net leverage around 5.5x.
Other 'BB' category pharma peers such as Teva Pharmaceuticals
Industries Limited (BB-/Negative) and Avantor Funding Inc.
(BB/Stable) have sizeable well diversified operations, whereas
Avantor's more conservative financial risk profile supports a
one-notch higher IDR, and Teva's substantial indebtedness and
reduced financial flexibility position it equally to Grifols,
despite it being the largest Fitch-rated non-investment-grade
company in the peer group.
Grunenthal Pharma GmbH & Co. Kommanditgesellschaft's (BB/Stable)
IDR is driven by its very conservative financial risk profile and
financial policies, combined with healthy cash flow, offsetting
organic portfolio volatility.
Nidda Bodco GmbH's (Stada; B/Stable) IDR is of limited
comparability to Grifols from a business model point of view.
Nevertheless, it shows some similarity in Fitch's rating approach
as it reflects Stada's sturdy 'BB' business quality as a regional,
well-diversified pharma manufacturer with aggressive low 'B'/'CCC'
level of financial risk.
The lower ratings of pharma peers such as CHEPLAPHARM Arzneimittel
GmbH (B+/Stable), Pharmanovia Bidco Ltd (B+/Negative) and European
Medco Development 3 S.a.r.l. (B/Stable) reflect their much smaller
operations, with concentrated product portfolios, although in the
case of Cheplapharm and Pharmanovia, they also reflect highly
cash-generative asset-light portfolios with FFO leverage of below
6.0x.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer
include:
-- Cash acquisition of Biotest for EUR2.0 billion in mid-FY22.
Bolt-on acquisition of EUR600 million in FY21, EUR150 million
in FY22, EUR500 million in FY23 and EUR1 billion in FY24.
Disposal proceeds of EUR150 million in FY22;
-- Proceeds from the sale of a minority stake in Biomat to GIC of
EUR840 million in FY21 treated as debt by Fitch;
-- High-single digit sales decline in FY21, driven by the
bioscience division and negative currency effects;
-- Low teens sales growth in FY22 and FY23, driven by a recovery
of the bioscience division and the acquisition of Biotest in
mid-FY22. Mid-single digit organic sales growth in 2024;
-- Temporary decline in EBITDA margin (excluding the contribution
of associate Shanghai RAAS) to about 20% in FY21 and FY22,
caused by the Covid-19-related impact of increasing plasma
collection costs;
-- Recovery in EBITDA margin towards 28% in 2023 and 29.5% in
2024, as raw material costs normalise and Biotest's new
products are launched and become accretive to margins;
-- Working capital outflows averaging EUR150 million over FY21-
FY24;
-- Capex moderating to EUR300 million in FY21 and EUR250 million
in FY22, followed by an increase to EUR350 million in FY23 and
EUR400 million in FY24;
-- Effective tax rate at 18% over the rating horizon;
-- No cash dividend paid in FY22 and FY23. Return of dividend in
FY24 with a 40% dividend payout; and
-- Acquisition of treasury shares of EUR126 million in FY21. No
acquisition of treasury shares beyond FY22.
KEY RECOVERY ASSUMPTIONS
Fitch uses a generic approach.
Based on the combination of US (about 70%) and non-US assets and
enterprise value in Grifols, Fitch treats the senior secured debt
as category 2 first-lien instruments, leading to a 'BB+'/ 'RR2'
senior secured rating. Fitch applies a minus one-notch to the IDR,
leading to the rating of 'B+'/'RR5' for senior unsecured debt
rating, given Grifols' multi-tier debt structure with a high amount
of prior ranking debt, which is guaranteed by the same entities as
for senior unsecured debt, with materially reduced recovery
prospects for the senior unsecured debt class.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive
rating action/upgrade:
-- Disciplined financial policy with FFO gross leverage below
5.0x (net 4.5x);
-- (cash from operations (CFO) - capex)/total debt with equity
credit sustainably above 7.5%;
-- Increased product diversification, reducing reliance on plasma
derivatives.
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- Diminished prospects of FFO gross leverage remaining below
6.0x (net 5.5x) on a sustained basis;
-- (CFO - capex)/total debt with equity credit sustainably below
5%;
-- Biotest integration challenges, delays in new product launches
or weakened cost management leading to decelerating sales and
EBITDA margins (Fitch-defined, excluding IFRS 16) declining
towards 20%;
-- Low single digit FCF margin on a sustained basis;
-- FFO interest coverage persistently below 3.0x.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate
issuers have a best-case rating upgrade scenario (defined as the
99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are
based on historical performance.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: The group has adequate liquidity thanks to the
lack of significant debt maturities until 2025. As of
end-June-2021, the group had EUR398 million (EUR580 million at
end-2020) in cash and pro-forma for the GIC transaction to close by
year-end, with the proceeds to repay the current drawdown of about
USD600 million, restoring full availability under a committed
revolving credit facility to USD1 billion maturing in 2025, which
cover debt maturities over 2021-2024 of under EUR1 billion.
Grifols has arranged a bridge facility for the EUR2 billion
acquisition of Biotest, which will be replaced by the new senior
unsecured bonds when the acquisition completes.
ESG CONSIDERATIONS
Grifols has an ESG Relevance Score of '4' for Governance Structure
and Group Structure due to the company's concentrated ownership and
complex group structure with some material related party
transactions due to operational collaboration with other
family-owned businesses. The concentrated ownership leads, in
Fitch's view, to a dominant family-centric decision-making allowing
the company to pursue a very aggressive debt-funded growth strategy
resulting in high indebtedness levels for a listed company, while
complex intertwined business transactions with family entities -
albeit conducted at arm's length - raise transparency questions,
both of which have a negative impact on the credit profile and are
relevant to the rating in conjunction with other factors.
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 the way in which they are being
managed by the entity.
ISSUER PROFILE
Grifols, S.A. is a global company specialising in the
hemotherapy/plasma derivatives sector - the medical discipline that
treats disease using blood components/proteins derived from human
plasma.
===========================
U N I T E D K I N G D O M
===========================
ARTEZ: Goes Into Administration, Project Faces Delay
----------------------------------------------------
Steve Robson at Manchester Evening News reports that construction
firm Artez has gone bust leaving a scheme backed by the Greater
Manchester Combined Authority at a standstill.
After several months of uncertainty, the Bolton-based builder went
into administration on Oct. 6, Manchester Evening News relates.
Developer Capital&Centric bought the site back in 2015 and was
given the green light for an ambitious plan to refurbish the
180-year-old mill and an extension into 201 apartments, Manchester
Evening News recounts.
The scheme made headlines when Capital&Centric announced that all
the flats would only be sold to owner-occupiers, rather than
overseas investors, Manchester Evening News discloses.
It was backed by a GBP25 million loan from the Greater Manchester
Combined Authority (GMCA), Manchester Evening News notes.
The project, which featured in the BBC documentary Manctopia, has
been hit by a number of delays, Manchester Evening News states.
Manchester Evening News understands a number of buyers have already
moved into the Crusader Mill site and Capital&Centric insists the
"vast majority" are finished.
The company says it will now take on the completion of the building
project itself, according to Manchester Evening News.
CASTELL PLC 2019-1: Moody's Hikes Rating on Class F Notes From B2
-----------------------------------------------------------------
Moody's Investors Service has upgraded the ratings of three notes
in Castell 2018-1 PLC and four notes in Castell 2019-1 PLC. The
rating action reflects the increased levels of credit enhancement
for the affected notes, and better than expected collateral
performance.
Moody's affirmed the ratings of the notes that had sufficient
credit enhancement to maintain their current ratings.
Issuer: Castell 2018-1 PLC
GBP244.87M Class A Notes, Affirmed Aaa (sf); previously on Feb 9,
2021 Affirmed Aaa (sf)
GBP22.57M Class B Notes, Affirmed Aaa (sf); previously on Feb 9,
2021 Upgraded to Aaa (sf)
GBP20.86M Class C Notes, Affirmed Aaa (sf); previously on Feb 9,
2021 Upgraded to Aaa (sf)
GBP14.36M Class D Notes, Upgraded to Aaa (sf); previously on Feb
9, 2021 Upgraded to Aa1 (sf)
GBP10.60M Class E Notes, Upgraded to Aa1 (sf); previously on Feb
9, 2021 Upgraded to A1 (sf)
GBP11.63M Class F Notes, Upgraded to A2 (sf); previously on Feb 9,
2021 Upgraded to Ba1 (sf)
Issuer: Castell 2019-1 PLC
GBP196.59M Class A Notes, Affirmed Aaa (sf); previously on Feb 9,
2021 Affirmed Aaa (sf)
GBP19.73M Class B Notes, Affirmed Aaa (sf); previously on Feb 9,
2021 Upgraded to Aaa (sf)
GBP15.78M Class C Notes, Upgraded to Aa1 (sf); previously on Feb
9, 2021 Upgraded to Aa3 (sf)
GBP6.575M Class D Notes, Upgraded to Aa3 (sf); previously on Feb
9, 2021 Upgraded to Baa1 (sf)
GBP5.26M Class E Notes, Upgraded to A1 (sf); previously on Feb 9,
2021 Affirmed Ba1 (sf)
GBP5.92M Class F Notes, Upgraded to Baa3 (sf); previously on Feb
9, 2021 Affirmed B2 (sf)
The two transactions are static cash securitisations of
non-conforming second lien residential mortgages extended to
obligors located in the UK with a relatively high exposure to
self-employed borrowers. Both transactions have a sequential
structure, and significant amounts of excess spread.
RATINGS RATIONALE
The rating action is prompted by an increase in credit enhancement
for the affected tranches, as well as decreased key collateral
assumptions, namely the portfolio Expected Loss (EL) in both
transactions and the MILAN CE assumption in Castell 2018-1 PLC due
to better than expected collateral performance.
Increase in Available Credit Enhancement
Sequential amortisation and fully funded reserve funds led to the
increase in the credit enhancement available in Castell 2018-1 PLC
and Castell 2019-1 PLC. Both transactions benefit from two reserve
funds each, the liquidity reserve and the general reserve. The
amortising liquidity reserve fund provides liquidity for the Class
A notes and Class B notes only, having been funded at closing
through application of principal receipts, and released amounts are
classified as principal receipts. The amortising general reserve is
available to all notes including to clear principal deficiency
ledger balances, and released amounts form revenue receipts,
furthermore the general reserves are amortising subject to a
minimum floor.
The credit enhancement for Classes B, C, D, E and F in Castell
2018-1 PLC increased to 52.7%, 39.4%, 30.2%, 23.5% and 16.1% from
44.8%, 33.7%, 26.1%, 20.4% and 14.3%, respectively since the last
rating action in February 2021.
The credit enhancement for Classes B, C, D, E and F in Castell
2019-1 PLC increased to 32.1%, 22.7%, 18.7%, 15.5% and 12.0% from
26.5%, 18.7%, 15.5%, 12.9% and 10.0%, respectively since the last
rating action in February 2021.
Key Collateral Assumptions:
As part of the rating action, Moody's reassessed its lifetime loss
expectation for the portfolio reflecting the collateral performance
to date.
The performance of Castell 2018-1 PLC and Castell 2019-1 PLC has
been better than initially expected at closing and at the last
review of these securitisations. Arrears greater than 90 days as a
percentage of current balance are currently standing at 3.47% and
1.79% respectively, with a pool factor at 50.1% and 72.9%
respectively. Cumulative losses in Castell 2018-1 PLC stand at
0.60% as a proportion of original balance, whereas they stand at
0.27% in Castell 2019-1 PLC. Furthermore, the phasing out of
coronavirus-related forbearance measures has not translated into
materially worsened collateral performance in either transaction.
Furthermore both transactions have moderate weighted average
current loan to indexed original values (including prior ranking
claims) of 57.4% and 57.9% respectively in Castell 2018-1 PLC and
Castell 2019-1 PLC respectively, which will support future
performance.
Moody's assumed an expected loss of 6.61% and 6.11% on current
balance for Castell 2018-1 PLC and Castell 2019-1 PLC respectively,
due to better than expected collateral performance. This
corresponds to an expected loss assumption as a percentage of the
original pool balance of 3.58% and 4.67% for Castell 2018-1 PLC and
Castell 2019-1 PLC respectively, down from the previous assumptions
of 4.50% and 6.00%.
Moody's has also assessed loan-by-loan information as a part of its
detailed transaction review to determine the credit support
consistent with target rating levels and the volatility of future
losses. Based on the assessment of the current composition of the
pool Moody's has decreased the MILAN CE assumption for Castell
2018-1 PLC to 21% from 23%. The MILAN CE assumption for Castell
2019-1 PLC remained unchanged at 21%.
The principal methodology used in these ratings was "Moody's
Approach to Rating RMBS Using the MILAN Framework" published in
December 2020.
The analysis undertaken by Moody's at the initial assignment of
ratings for RMBS securities may focus on aspects that become less
relevant or typically remain unchanged during the surveillance
stage.
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: (i) performance of the underlying collateral that
is better than Moody's expected; (ii) an increase in available
credit enhancement; (iii) improvements in the credit quality of the
transaction counterparties; and (iv) a decrease in sovereign risk.
Factors or circumstances that could lead to a downgrade of the
ratings include: (i) an increase in sovereign risk; (ii)
performance of the underlying collateral that is worse than Moody's
expected; (iii) deterioration in the notes' available credit
enhancement; and (iv) deterioration in the credit quality of the
transaction counterparties.
DERBY COUNTY FOOTBALL: HMRC May Take Debt Haircut to Rescue Club
----------------------------------------------------------------
Charlie Walker at MailOnline reports that the taxman will have to
"take a haircut" and write off millions of pounds of debt it is
owed by Derby County Football Club, if a deal is to be struck to
save the Championship club.
According to MailOnline, the second-tier side are believed to owe
around GBP28 million to HMRC, but sources spoken to by Sportsmail,
say the taxpayer is unlikely to receive full payment if the club is
to survive.
The actual amount the government would have to write-off in any
rescue bid will depend on the deal the administrators and buyers
can strike, but analysts have put the figure at GBP10 million or
more, MailOnline notes.
The problem for Derby is that the club's total debts are far
greater than its market value, and the taxpayer holds the lion's
share of the money owed, which all in is believed to be over GBP60
million, MailOnline states.
One option is for the club to be bought and then the debts settled
through a company voluntary agreement, which would see unsecured
creditors offered 25 pence for each pound owed, MailOnline relays.
However, through this route, a separate agreement would be needed
with the taxman, according to MailOnline.
As it stands, the future hangs in the balance,' said one source,
who has acted for potential buyers, MailOnline discloses. "And it
depends on HMRC. Ultimately, it is a political decision. Derby is
one decision away from going out of business."
Of course, the Revenue has been forced to accept reduced payments
in previous football club administrations, MailOnline notes.
But this one is different. It is the first one since HMRC's
preferential status as a creditor was restored.
Senior figures within the game are now facing up to the possibility
that Derby may not emerge from the financial ruins of its current
predicament brought on by years of overspending in pursuit of
promotion to the Premier League.
Some have suggested the club's chances of survival may be as low as
50%, according to MailOnline.
Critical to survival is how much a potential buyer is prepared to
pay, MailOnline says.
Derby's market value is estimated at significantly less than GBP30
million, so the costs of taking it on need to be reduced to that
level, MailOnline discloses.
Derby's Pride Park, which stands like a cathedral in the low-rise
regeneration of a former rail yard on the outskirts of the city,
holds 33,000.
However, the club sold it in 2017-18 to another company owned by
Mel Morris to raise funds to pay for players' wages and balance the
books in the promotion push, MailOnline notes.
The Rams' situation is complicated by the status of its stadium,
say experts.
Of the total debt, GBP20 million is owed to MSD capital and secured
against the ground. As a result, MSD will have to be part of the
solution to the club's problems, according to MailOnline.
Under EFL rules, Derby will have to show security of tenure through
ownership or a lease on the stadium for 10 years otherwise the sale
will not be allowed to go through, MailOnline discloses. Mel
Morris has reportedly indicated he is prepared to sell the ground
as part of any deal to save the club, MailOnline notes.
Leaving the problem of the stadium aside, the Rams still have a
huge challenge to restructure the remaining debt, MailOnline says.
Football creditors are thought to be owed about GBP7 million and
are secured, HMRC (GBP28 million) has Crown Preference, which
leaves a further GBP10 million or so owed to others creditors like
kit and pie suppliers, MailOnline states.
Those unfortunate firms may be forced to accept 25% of what they
are owed in any recovery plan, MailOnline notes.
Even so, with the cost of the administrators factored in (which
came to more than GBP2 million when Wigan was in administration
earlier this year), the remaining debts will still be in the region
of GBP40 million, MailOnline discloses.
Hence, consultants spoken to by Sportsmail are all of the view that
survival will require HMRC taking a big cut, according to
MailOnline.
One analyst says that if HMRC can be persuaded to accept GBP10
million less, then the cost of taking over Derby can be reduced to
GBP30 million and a sale could take place, but it is still
considered a "difficult deal to do", MailOnline relates.
"That gives you an idea of the haircut HMRC will have to take,"
MailOnline quotes the football consultant as saying.
There are potential alternatives.
In another scenario, if a buyer (or benefactor) is willing to pay
above the market rate for the club, HMRC may be persuaded to accept
some money up front and then long repayment terms on the rest,
MailOnline discloses.
Another alternative method would involve a new company buying the
club's assets, including its license to play in the EFL, and using
third party funds to pay unsecured creditors and HMRC 25 pence in
the pound, according to MailOnline.
This would require the agreement of the EFL -- or in other words
the 71 other clubs -- but if successful it would wipe GBP20 million
off the HMRC debt, MailOnline says. Opinion is divided on whether
this is a viable option.
Whatever route out of administration that Derby County can take,
the buyer will have to deep pockets, since as well as dealing with
the debt, they will also have to show proof of funds in order to
assure the EFL they can run the club for two years, according to
MailOnline.
Derby County has been losing around GBP15 million a year,
MailOnline statse. While the administrators are cutting costs --
up to 20 staff have been made redundant in the last week and there
will be more savings ahead -- losses will continue and that will
have to be factored in, according to MailOnline.
DERBY COUNTY FOOTBALL: Owes GBP15MM to MSD Holdings
---------------------------------------------------
Simon Stone at BBC Sport reports that Derby County Football Club
owe GBP15 million to MSD Holdings, as confirmed by the US
investment group.
The detail is included within MSD's annual financial statements,
BBC Sport notes.
MSD has become a significant presence in English football, lending
money to a number of Premier League and Championship clubs,
including Burnley and Derby, BBC Sport discloses.
The Rams went into administration last month amid spiralling
losses, triggering a 12-point deduction, BBC Sport relays.
As a second-tier club, Derby have no access to those funds, BBC
Sport states.
And MSD confirmed that "one of the underlying borrowers associated
with a GBP15 million loan entered administration", according to BBC
Sport.
However, the statement added that "the company holds collateral
well in excess of the loan's outstanding principal and interest",
BBC Sport notes.
This is understood to be against Derby's Pride Park Stadium, BBC
Sport says.
In addition to this sum, Derby are known to owe HMRC in excess of
GBP20 million, plus significant sums to other football creditors,
including former manager Phillip Cocu, ex-captain Richard Keogh,
and Arsenal, who have deferred the remaining GBP8 million they are
owed for Polish defender Krystian Bielik, BBC Sport relates.
NMCN: Sale May Secure Most of 1,700 Jobs, CEO Says
--------------------------------------------------
Tom Pegden at Leicester Mercury reports that most of the
1,700-or-so jobs at NMCN plc, a big Nottingham-based business,
which has gone into administration could be saved.
The construction engineering company was in the process of building
a 522 student bedroom complex in Traffic Street which is estimated
be worth GBP35 million, Leicester Mercury discloses.
It was also working on a controversial major roadwork scheme around
Liverpool Lime Street station -- a significant gateway into the
city, Leicester Mercury notes.
According to Leicester Mercury, 2019 accounts showed revenues of
GBP404.6 million (up almost 19 per cent year-on-year) and pre-tax
profits of GBP7.4 million (up a quarter).
But Grant Thornton were appointed as administrators this week as
NMCN plc failed to sign off its 2020 accounts or re-finance the
business, Leicester Mercury recounts.
According to trade publication Construction Enquirer a letter from
NMCN CEO Lee Marks sent to staff says the infrastructure, plant
transport & accommodation, telecoms and water divisions are
expected to be sold in the next couple of days, Leicester Mercury
states.
The publication, as cited by Leicester Mercury, said Mr. Marks
wrote: "These potential sales will secure the jobs of the vast
majority of our employees as your current employment with NMCN will
transfer to the new organization under TUPE, with the interested
parties taking on certain people and projects.
"While this is positive news for the majority of our people, I
understand that these are worrying times for everyone."
Administrator Grant Thornton will hold calls with employees to
discuss TUPE or redundancy options, Leicester Mercury discloses.
PATAGONIA BIDCO: Moody's Assigns First Time B2 Corp. Family Rating
------------------------------------------------------------------
Moody's Investors Service has assigned a first-time B2 corporate
family rating and a B2-PD probability of default rating to
Patagonia Bidco Limited (Huws Gray or the company), a leading
independent General Builders Merchant (GBM) distributor in the UK
that provides a broad range of building materials to both trade and
retail customers. Concurrently, Moody's has also assigned a B2
rating to the senior credit facilities, comprising term loan B
(TLB) tranches (split in EUR and GBP) totalling equivalent GBP950
million and a GBP125 million Revolving Credit Facility (RCF), to be
borrowed by Patagonia Bidco Limited. The outlook is stable.
Proceeds from the TLB will be used in connection with (1) the
change in Huws Gray ownership under which Blackstone has acquired a
majority stake in the company from its founders and (2) the agreed
acquisition by Huws Gray of the British merchanting businesses
(Fleming) of Grafton plc, which is expected to completed in the
first quarter of 2022 following completion of a review by the
Competition and Markets Authority.
RATINGS RATIONALE
Huws Gray has a business model which is focused on serving the
needs of smaller customers, with a deep and wide array of stock
available for collection or delivery from its branch network. A
decentralised structure gives branches flexibility, albeit within a
framework that includes a propriety technology system designed to
maximise sustainable margins. This has allowed the company to enjoy
a long track record of strong growth in revenues and profitability,
in each case driven by both good organic trends and improvements
extracted from acquired businesses.
The company has performed particularly well during the Coronavirus
pandemic, which included only a limited period when full branch
closures were required. Strong subsequent demand has been most
notable in the Repair, Maintenance and Improvements (RMI) segment,
which represents a significant proportion of the company's
revenues. Revenues in RMI are also more stable through the business
cycle than the new build segment.
Huws Gray B2 CFR is also supported by (1) the increased scale,
geographic reach and revenue diversity that the Fleming acquisition
will give; (2) scope for both cost synergies and a gradual
improvement in revenues and margins within Fleming as Huws Gray
best practices are applied; and (3) Moody's expectations of
deleveraging and positive free cash flow (FCF) generation.
Less positively, the CFR also factors in (1) the company's still
relatively small size even after the Fleming acquisition; (2) high
geographical concentration, linked to the economic health of a
single country; (3) some execution risks on the integration of
Fleming, which is far larger than previous acquisitions, and the
achievement of the cost synergies plan; (4) a highly leveraged
capital structure following the change in ownership with pro-forma
gross leverage of around 6.0x measured as Moody's-adjusted debt to
EBITDA; and (5) the potential for additional debt-funded
acquisitions.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Moody's takes into account the impact of environmental, social and
governance (ESG) factors when assessing companies' credit quality.
The rating agency considers environmental and social trends are
broadly supportive of Huws Gray's credit profile in light of the
ongoing focus of politicians on energy efficiency of buildings and
sustainability which will continue to support demand for renovation
and improvement of building stock for the foreseeable future.
Moody's governance assessment for Huws Gray factors in its control
by a private equity firm, which in the rating agency's experience
tend to have tolerance for high leverage and aggressive financial
policies. Moody's nevertheless acknowledges the sizeable minority
stake still in the hands of Huws Gray founders and management as a
credit positive.
LIQUIDITY
Huws Gray's liquidity is adequate, supported by approximately
GBP100 million of cash pro-forma for the transaction and the fully
available GBP125 million RCF maturing in 2028. Moody's expects Huws
Gray to generate underlying positive FCF of more than GBP30 million
a year in both 2022 and 2023. However, while the company's
management has expressed their intention of focusing on the
integration of Fleming in the near term, the rating agency also
notes the potential for the company to continue with its long
established strategy of making bolt-on acquisitions, which would
consume at least a part of the cash generated.
The RCF will be subject to a consolidated senior secured debt
springing covenant when the RCF is drawn above 40%. Moody's expects
that Huws Gray will maintain significant capacity under this
covenant.
STRUCTURAL CONSIDERATIONS
The B2 rating assigned to the TLB and RCF, both due in 2028, is in
line with the CFR, reflecting the fact that these facilities rank
pari passu among themselves. In line with current market practice
the facilities have only modest security, comprising primarily
share pledges and a floating charge over the assets of the
borrower, which is a holding company. Guarantees will be provided
by all material subsidiaries with a guarantor coverage of at least
80% of the group's EBITDA.
The PDR of B2-PD reflects Moody's assumption of a 50% family
recovery rate, consistent with a debt structure of bank debt with
loose financial covenants.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation of a low single
digit organic revenue growth along with solid growth in
profitability, with Moody's adjusted debt/EBITDA trending towards
5.5x in the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure will require a sustained improvement in
credit metrics, with (1) debt / EBITDA ratio falling sustainably
below 5.0x; (2) Moody's-adjusted operating margin in the mid to
high single digits in percentage terms on a sustained basis; and
(3) FCF / debt sustainably in high single digit figures in
percentage terms.
Conversely, negative rating pressure could arise if (1) Moody's
adjusted gross debt/EBITDA is above 6.25x; (2) Moody's-adjusted
operating margin fell towards 5%; (3) FCF turned sustainably
negative; or (4) liquidity profile deteriorates.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Distribution &
Supply Chain Services Industry published in June 2018.
LIST OF AFFECTED RATINGS
Issuer: Patagonia Bidco Limited
Assignments:
Probability of Default Rating, Assigned B2-PD
LT Corporate Family Rating, Assigned B2
Senior Secured Bank Credit Facility, Assigned B2
Outlook Actions:
Outlook, Assigned Stable
CORPORATE PROFILE
Huws Gray is one of the UK's leading independent General Builders
Merchants providing a broad range of building materials to both
trade and retail customers. With 114 branches (77% freehold) under
Huws Gray and 201 branches (51% freehold) under Fleming, the
enlarged group will have fairly broad national coverage and annual
revenues of around GBP1.5 billion in 2021 pro forma for a full year
contribution from Fleming. Blackstone acquired a 75% stake in Huws
Gray in June 2021 with its founders and management holding the
remaining 25%.
PATAGONIA HOLDCO 3: S&P Assigns 'B' ICR, Outlook Stable
-------------------------------------------------------
S&P Global Ratings assigned its 'B' ratings to Huws Gray's
intermediate parent company Patagonia Holdco 3 Ltd. and to the
GBP950 million-equivalent term loan B.
The stable outlook indicates that S&P expects Huws Gray to sustain
S&P Global Ratings-adjusted debt to EBITDA below 6.5x, supported by
moderate growth in EBITDA as the combined group realizes its plan
of efficiencies and cost-saving initiatives.
In June 2021, private equity firm Blackstone has announced that it
acquired Huws Gray, a U.K.-based general builders merchant (GBM)
distributor. At the same time, Huws Gray is acquiring Grafton PLC's
GBM business for an enterprise value of GBP520 million. As part of
the transaction, Huws Gray plans to issue:
-- A term loan B facility equivalent to GBP950 million, of which
GBP400 million will be subject to delayed draw and will become
available once the acquisition of Grafton's GBM business has
closed; and
-- A GBP125 million RCF, of which GBP50 million will likewise be
subject to delayed draw and fully available upon the closing of the
acquisition.
Blackstone and management will also contribute about GBP800 million
of equity, of which 98% will be in the form of preference shares.
S&P considers that the preference shares held proportionally by the
sponsor and management qualify for equity treatment under its
criteria because of the expected preferred coupon rate,
equity-stapling clause, and the highly subordinated and
default-free features. The proceeds will be used to fund both
acquisitions and pay the transaction fees. No debt will be rolled
over in the capital structure. Huws Gray expects to close the
acquisition of Grafton's GBM business in or before February 2022.
The combined group will benefit from a strong market position in
the U.K. GBM market, but scale will lag larger distributors. Adding
Grafton's GBM business to that of Huws Gray will nearly triple the
number of branches to 315 from 114, making it the No. 3 player. It
will still lag the No. 1 player, Travis Perkins, which has 1,700
branches; and Jewson, which has 500 branches across the U.K.
S&P said, "We forecast that the combined group will benefit from
its significant exposure to the stable repair, maintenance, and
improvement segment, where it will generate about 70% of sales. The
group will have a wide array of product offerings; long-standing
relationships with a broad base of customers and suppliers; and
generally attractive growth prospects, both organic and as bolt-on
opportunities. In addition, the group has significant exposure to
small customers such as small and midsize enterprises, tradesmen,
and individual customers, who are less sensitive to price movements
as they typically pass the increase onto their clients. These
strengths are tempered by Patagonia's concentration of operations
solely in the U.K. and its relatively modest scale of operations,
with network density lagging that of other distributors such as
Travis Perkins or BME Group. The group has limited diversity
outside of the GBM market, although Grafton GBM has some activities
in the lighting and electric, kitchens, and plumbing and heating
markets. We consider that Patagonia is better placed in the rating
category than similar North American peers with more limited
product ranges."
Huws Gray will need to invest in integration and the realization of
cost synergies before seeing profitability gains. Its business plan
assumes swift integration after the transaction closes and
realization of synergies in the procurement, IT, administrative,
and other functions within the first 18-24 months. Management's
base case includes about GBP30 million of cost synergies and about
GBP13 million of commercial excellence initiatives although they
are targeting to achieve higher levels.
Management has a strong record of delivering synergies and
integration in the past. Huws Gray has completed more than 60
transactions since its inception, including Ridgeon in 2018,
through which substantial profitability improvements were realized.
That said, S&P factors in the execution risks related to the
scalability of Huws Gray's model and to the integration and cost
savings plan. Management assumes sizable costs of GBP12 million to
achieve the synergies, mainly in 2022 and 2023, which we include in
our calculation of EBITDA.
S&P said, "As a result, we expect to see any uplift in Huws Gray
margins delayed to the second half of 2023 or first half of 2024.
In addition, given that historically Grafton's margins have been
significantly lower than those of Huws Gray, we anticipate that
restoring margins to the levels seen before the acquisition of
Grafton may take longer. That said, we forecast an adjusted EBITDA
margin of about 10.2%-10.5% in 2021 and about 11% in 2022 for the
combined group. This compares favorably with the 8.9%-9% we
anticipate for Travis Perkins, and 6.0%-7.0% for BME Group, in the
equivalent period. We believe the group's margins will benefit from
its overall greater efficiency and differentiation, factoring in
its focus on smaller clients; smart, customer-tailored pricing; and
emphasis on more profitable sales channels.
"We think Huws Gray's growth may be driven by bolt-on acquisitions,
as well as integration with the Grafton GBM business. We do not
deduct cash from debt in our calculation owing to Huws Gray'
private-equity ownership. Despite management's focus on integration
with the Grafton GBM business, we anticipate that, over time, cash
could be partly used to fund acquisitions. The builders merchant
market in the U.K. is highly fragmented, with about 60% of branches
owned by small independents. As such, it presents attractive
consolidation opportunities.
"We forecast adjusted leverage of 6.4x-6.6x in 2021, moderating to
about 6.0x in 2022. As a result, we view the company's financial
profile as highly leveraged. That said, we consider Huws Gray has
limited capital expenditure (capex) needs thanks to the asset-light
nature of the business and its countercyclical working capital
characteristics. It typically has a release in a downturn, which is
supportive to cash flow generation and the credit profile. We
forecast free operating cash flow (FOCF) of about GBP30
million-GBP40 million in 2021-2022.
"The stable outlook indicates that we expect Huws Gray to sustain
adjusted debt to EBITDA below 6.5x, supported by moderate growth in
EBITDA as the combined group realizes its plan of efficiencies and
cost-saving initiatives between the two businesses. We anticipate
that the group will generate positive FOCF in 2021-2022, and
maintain adequate liquidity and headroom under its financial
covenants.
"We could lower the rating if we expect adjusted debt to EBITDA to
deteriorate to above 6.5x without swift recovery prospects. This
could occur if the integration process runs into difficulties;
there are cost pressures caused by slower-than-anticipated
pass-through of raw material costs to customers; or
weaker-than-expected market conditions, leading to negative FOCF.
We could also lower the rating if liquidity pressure arose or
Patagonia and its sponsor were to follow a more-aggressive strategy
with regards to acquisitions or shareholder returns."
The probability of an upgrade over our 12-month rating horizon is
limited, given the group's high leverage. However, S&P could
consider raising the rating if:
-- Adjusted debt to EBITDA reduced consistently to below 5x;
-- Funds from operations (FFO) to debt increased consistently to
above 12%; and
-- Patagonia's management and financial sponsor showed commitment
to maintaining leverage metrics at these levels.
PREFERRED RESIDENTIAL 06-01: Fitch Cuts Class E1c Debt Rating to B-
-------------------------------------------------------------------
Fitch Ratings has upgraded Preferred Residential Securities (PRS)
05-2 PLC's class D1c notes and Preferred Residential Securities
06-1 PLC's class FTc notes. Fitch has also downgraded both
transactions' class E1c notes and removed them from Rating Watch
Negative (RWN). Fitch has affirmed all other notes in both
transactions.
DEBT RATING PRIOR
---- ------ -----
Preferred Residential Securities 06-1 PLC
Class B1a XS0243655577 LT AAAsf Affirmed AAAsf
Class B1c XS0243665022 LT AAAsf Affirmed AAAsf
Class C1a XS0243658670 LT AAAsf Affirmed AAAsf
Class C1c XS0243665964 LT AAAsf Affirmed AAAsf
Class D1a XS0243659728 LT Asf Affirmed Asf
Class D1c XS0243666939 LT Asf Affirmed Asf
Class E1c XS0243669529 LT B-sf Downgrade Bsf
Class FTc XS0243675336 LT BB+sf Upgrade Bsf
Preferred Residential Securities 05-2 PLC
Class B1a XS0234207594 LT AAAsf Affirmed AAAsf
Class B1c XS0234208485 LT AAAsf Affirmed AAAsf
Class C1a XS0234209020 LT AAAsf Affirmed AAAsf
Class C1c XS0234209459 LT AAAsf Affirmed AAAsf
Class D1c XS0234212594 LT Asf Upgrade A-sf
Class E1c XS0234213642 LT B-sf Downgrade Bsf
TRANSACTION SUMMARY
The transactions are securitisations of seasoned non-conforming
residential mortgage loans originated by Preferred Mortgages
Limited. The mortgage pools consist of owner-occupied and
buy-to-let (BTL) loans.
KEY RATING DRIVERS
Increased Late Stage Arrears: Total arrears in both transactions
have been trending down from the levels reached during 2020,
reaching 25.9% for PRS 05-2 and 19.5% for PRS 06-1 in June 2021.
Both transactions have reported a moderate accumulation of late
stage arrears, with loans in arrears by more than three months
representing 19.0% and 16.4 % of the mortgage pools for PRS 05-2
and PRS 06-1, respectively. The rise in late stage arrears is
partially due to the moratorium on possessions implemented during
the Covid-19 pandemic. The moratorium restricted servicers' ability
to proceed with possession orders, leading to increased late stage
arrears, which would ordinarily be foreclosed.
Credit Enhancement (CE) Accumulation: CE has increased in both
transactions as they continue to amortise sequentially due to late
stage arrears trigger breaches. CE available for the senior notes
has increased to 92.2% for PRS 05-2 and 83.8% for PRS 06-1,
compared with 81.6% and 74.9% at the last review in October 2020.
The build-up in CE for PRS 05-2's class D notes of is sufficient
for the notes to withstand higher rating stresses, leading Fitch to
upgrade the notes by one notch.
PRS 06-1 Class FTc Approaching Full Redemption: The class FTc notes
in PRS 06-1, which are redeemed through excess revenue funds, are
now close to full redemption. As of the September interest payment
date, these notes have an outstanding balance of approximately
GBP125,000, down from GBP535,000 over the previous year. Based on
its recent performance, Fitch expects the notes to redeem in full
during the next year, with the small outstanding balance increasing
its resilience to a period of stress. The upgrade to 'BB+sf', the
maximum rating that can be assigned to excess spread notes,
reflects the short remaining life.
Foreclosure Frequency (FF) Macroeconomic Adjustments: Fitch applied
FF macroeconomic adjustments to the owner-occupied non-conforming
subpools of both transactions because of the expectation of a
temporary mortgage underperformance (see Fitch Ratings to Apply
Macroeconomic Adjustments for UK Non-Conforming RMBS to Replace
Additional Stress). With the government's repossession ban ended,
there is still uncertainty regarding borrowers' performance in the
UK nonconforming sector where many borrowers have already rolled
into late arrears over recent months. Borrowers' payment ability
may also be challenged with the end of the Coronavirus Job
Retention Scheme and the Self-employed Income Support Scheme. The
adjustment is of 1.58x at 'Bsf', while no adjustment is applied at
'AAAsf' as assumptions are deemed sufficiently remote at this
level.
Off RWN: The class E1c notes in both transactions were placed on
RWN in September 2021 due to a change in the rating determination
for notes with a model-implied rating (MIR) lower than 'B-sf'. The
updated UK RMBS Rating Criteria provides that rating committees
will now determine a rating in the range of 'Csf' to 'B-sf' instead
of up to 'B+sf' for notes with a MIR lower than 'B-sf'. This is
reflected in the downgrades.
Elevated Senior Fees: Both transactions have been incurring an
increased level of senior fees since 2018. Fitch has reflected this
observed increase in its fee assumptions for the transactions by
assuming the average of the costs incurred in the last three years
are incurred on an ongoing basis. The increase in senior fee
assumptions has a negative impact on the most junior notes in both
transactions.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- The transactions' performance may be affected by changes in
market conditions and economic environment. Weakening economic
performance is strongly correlated to increasing levels of
delinquencies and defaults that could reduce CE available to
the notes.
-- Unanticipated declines in recoveries could also result in
lower net proceeds, which may make certain notes susceptible
to negative rating action depending on the extent of the
decline in recoveries. Fitch conducts sensitivity analyses by
stressing both a transaction's base-case FF and recovery rate
(RR) assumptions, and examining the rating implications on all
classes of issued notes. Fitch considered a scenario assuming
a 15% increase in the WAFF and a 15% decrease in the WARR. The
results indicate downgrades of up to five notches.
Factor that could, individually or collectively, lead to positive
rating action/upgrade:
-- Stable to improved asset performance driven by declining
levels of delinquencies and defaults would lead to lower
estimated WAFF and continued increases in CE levels and
supporting potential upgrades. Fitch tested an additional
rating sensitivity scenario by applying a decrease in the FF
of 15% and an increase in the RR of 15%. For PRS 2005-2, the
ratings for the class D notes could be upgraded by up to two
notches and class E notes by six notches. For PRS 2006-1, the
ratings for the class D notes could be upgraded by up to two
notches.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical performance.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pools and the transactions. Fitch has not reviewed the results of
any third party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Fitch did not undertake a review of the information provided about
the underlying asset pool[s] ahead of the transaction's initial
closing. The subsequent performance of the transactions over the
years is consistent with the agency's expectations given the
operating environment and Fitch is therefore satisfied that the
asset pool information relied upon for its initial rating analysis
was adequately reliable.
Overall, Fitch's assessment of the information relied upon for the
agency's rating analysis according to its applicable rating
methodologies indicates that it is adequately reliable.
ESG CONSIDERATIONS
Preferred Residential Securities 05-2 and 06-1 haves an ESG
Relevance Score of '4' for Human Rights, Community Relations,
Access & Affordability due to the pools containing owner-occupied
loans advanced with limited affordability checks and self-certified
income, which has a negative impact on the credit profile, and is
relevant to the ratings in conjunction with other factors.
Preferred Residential Securities 05-2 and 06-1 have an ESG
Relevance Score of '4' for Customer Welfare - Fair Messaging,
Privacy & Data Security due to a material concentration of interest
only loans which has a negative impact on the credit profile, and
is relevant to the ratings in conjunction with other factors.
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 the way in which they are being
managed by the entity.
SOUTHERN PACIFIC 06-A: Moody's Ups Class D1 Notes Rating to B2
--------------------------------------------------------------
Moody's Investors Service has upgraded the ratings of 8 notes
issued by Southern Pacific Financing 05-B plc, Southern Pacific
Financing 06-A plc and Southern Pacific Securities 06-1 plc. The
rating action reflects better than expected collateral performance
and the increased levels of credit enhancement for the affected
notes.
Moody's affirmed the ratings of the notes that had sufficient
credit enhancement to maintain the current rating on the affected
notes.
Issuer: Southern Pacific Financing 05-B plc
GBP397.44M Class A Notes, Affirmed Aa1 (sf); previously on Dec 10,
2009 Downgraded to Aa1 (sf)
GBP34.56M Class B Notes, Affirmed Aa1 (sf); previously on Oct 14,
2015 Upgraded to Aa1 (sf)
GBP19.2M Class C Notes, Upgraded to Aa1 (sf); previously on Oct
14, 2015 Upgraded to Aa2 (sf)
GBP21.6M Class D Notes, Upgraded to Ba2 (sf); previously on Oct
14, 2015 Upgraded to Ba3 (sf)
GBP7.2M Class E Notes, Affirmed Caa1 (sf); previously on Oct 14,
2015 Upgraded to Caa1 (sf)
Issuer: Southern Pacific Financing 06-A plc
GBP372.96M Class A Notes, Affirmed Aa1 (sf); previously on Mar 30,
2010 Downgraded to Aa1 (sf)
GBP14.7M Class B Notes, Affirmed Aa1 (sf); previously on Oct 14,
2015 Upgraded to Aa1 (sf)
GBP19.11M Class C Notes, Upgraded to Baa3 (sf); previously on Mar
30, 2010 Downgraded to Ba1 (sf)
GBP9.45M Class D1 Notes, Upgraded to B2 (sf); previously on Mar
30, 2010 Downgraded to Caa1 (sf)
GBP3.78M Class E Notes, Affirmed Caa2 (sf); previously on Mar 30,
2010 Downgraded to Caa2 (sf)
Issuer: Southern Pacific Securities 06-1 plc
GBP24.59M Class B1c Notes, Affirmed Aa1 (sf); previously on Aug
12, 2014 Upgraded to Aa1 (sf)
EUR16.15M Class C1a Notes, Upgraded to Aa1 (sf); previously on Oct
14, 2015 Upgraded to A1 (sf)
GBP3.15M Class C1c Notes, Upgraded to Aa1 (sf); previously on Oct
14, 2015 Upgraded to A1 (sf)
EUR3M Class D1a Notes, Upgraded to Baa3 (sf); previously on Oct
14, 2015 Upgraded to B2 (sf)
GBP6.95M Class D1c Notes, Upgraded to Baa3 (sf); previously on Oct
14, 2015 Upgraded to B2 (sf)
The transactions are static cash securitisations of legacy
non-conforming mortgage loans secured on residential properties
located in the UK.
RATINGS RATIONALE
The rating action is prompted by:
decreased key collateral assumptions, namely the portfolio
Expected Loss (EL) and MILAN CE assumptions due to better than
expected collateral performance
an increase in credit enhancement for the affected tranches
Revision of Key Collateral Assumptions:
As part of the rating actions, Moody's reassessed its lifetime loss
expectations and recovery rates for the portfolios reflecting their
collateral performance to date.
Despite relatively high delinquencies, the cumulative losses have
remained stable since last year. 90+ delinquencies are currently
standing at:
(i) for Southern Pacific Financing 05-B plc, 38.79%, and cumulative
losses at 1.68% unchanged since last year.
(ii) for Southern Pacific Financing 06-A plc, 38.67%, and
cumulative losses at 3.06% unchanged since last year.
(iii) for Southern Pacific Securities 06-1 plc, 54.38%, and
cumulative losses at 3.80% up from 3.76% last year.
Moody's assumed the expected loss as a percentage of current pool
balance as follows:
(i) for Southern Pacific Financing 05-B plc, 5.0%.
(ii) for Southern Pacific Financing 06-A plc, 6.0%.
(iii) for Southern Pacific Securities 06-1 plc, 8.0%.
This corresponds to expected loss assumptions as a percentage of
original pool balance of:
(i) for Southern Pacific Financing 05-B plc, 2.16%.
(ii) for Southern Pacific Financing 06-A plc, 3.69%.
(iii) for Southern Pacific Securities 06-1 plc, 4.57%.
Moody's has also assessed loan-by-loan information as a part of its
detailed transaction review to determine the credit support
consistent with target ratings levels and the volatility of future
losses. As a result, Moody's has decreased the MILAN CE assumption
of each transaction as follows:
(i) for Southern Pacific Financing 05-B plc, to 20% from 26%.
(ii) for Southern Pacific Financing 06-A plc, to 24% from 27%.
(iii) for Southern Pacific Securities 06-1 plc, to 28% from 34%.
The expected losses and MILAN CE assumptions are higher than
average for the sector due to higher delinquencies as well as
adverse pool characteristics. For example in Southern Pacific
Securities 06-1 plc, 62.7% of the pool are interest-only loans,
75.32% of the loans were provided to self-certified borrowers,
21.05% of the pool was subject to one or more CCJs, and 5.32% are
second lien loans.
Increase in Available Credit Enhancement
Sequential amortization and non-amortizing reserve funds led to the
increase in the credit enhancement available in these
transactions.
For instance, the credit enhancement for the tranches affected by
today's rating action increased:
(i) for tranche C of Southern Pacific Financing 05-B plc, to 43.53%
from 24.5% at last rating action, and for tranche D, to 18.52% from
10.42%.
(ii) for tranche C of Southern Pacific Financing 06-A plc, to
30.61% from 15.98% at last rating action, and for tranche D1, to
14.37% from 7.50%.
(iii) for tranches C1a and C1c of Southern Pacific Securities 06-1
plc, to 49.52% from 27.63% at last rating action, and for tranches
D1a and D1c, to 22.61% from 12.61%.
Moody's also considered how the liquidity available in the
transactions supports the ratings of the notes. In particular:
(i) for Southern Pacific Financing 05-B plc, a reserve fund of
GBP4.56M and a liquidity facility of GBP5.38M.
(ii) for Southern Pacific Financing 06-A plc, a reserve fund of
GBP3.36M and a liquidity facility of GBP5.12M.
(iii) for Southern Pacific Securities 06-1plc, a reserve fund of
GBP1.8M and a liquidity facility of GBP4.01M.
Moody's notes that fixed fees and expenses in these transactions
are relatively high compared to the low outstanding pool balances,
which has been reflected in the analysis.
The servicer is an unrated entity and the transactions' mitigating
structural features are not sufficient to achieve the Aaa (sf)
rating. As a result, Financial Disruption Risk constrains the
ratings of Classes A, B, C of Southern Pacific Financing 05-B plc,
A and B of Southern Pacific Financing 06-A plc and B1c, C1a and C1c
of Southern Pacific Securities 06-1 plc.
The principal methodology used in these ratings was "Moody's
Approach to Rating RMBS Using the MILAN Framework" published in
December 2020.
The analysis undertaken by Moody's at the initial assignment of
ratings for RMBS securities may focus on aspects that become less
relevant or typically remain unchanged during the surveillance
stage.
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: (i) performance of the underlying collateral that
is better than Moody's expected; (ii) an increase in available
credit enhancement; (iii) improvements in the credit quality of the
transaction counterparties; and (iv) a decrease in sovereign risk.
Factors or circumstances that could lead to a downgrade of the
ratings include: (i) an increase in sovereign risk; (ii)
performance of the underlying collateral that is worse than Moody's
expected; (iii) deterioration in the notes' available credit
enhancement; and (iv) deterioration in the credit quality of the
transaction counterparties.
TOWD POINT 2019-GRANITE 4: Fitch Raises Cl. F Debt Rating to 'BB+'
------------------------------------------------------------------
Fitch Ratings has upgraded four tranches of Towd Point Mortgage
Funding 2019 - Granite 4 (GR4) and removed them from Rating Watch
Positive (RWP). All other notes have been affirmed.
DEBT RATING PRIOR
---- ------ -----
Towd Point Mortgage Funding 2019 - Granite 4 plc
Class A1 XS1968576568 LT AAAsf Affirmed AAAsf
Class B XS1968576642 LT AAAsf Upgrade AA+sf
Class C XS1968576998 LT A+sf Affirmed A+sf
Class D XS1968577293 LT A+sf Upgrade A-sf
Class E XS1968577376 LT BBB+sf Upgrade BBB-sf
Class F XS1968577459 LT BB+sf Upgrade BBsf
TRANSACTION SUMMARY
This transaction is a securitisation of prime UK owner-occupied
mortgages originated by Northern Rock plc prior to the global
financial crisis.
KEY RATING DRIVERS
Increased Credit Enhancement (CE)
The notes in the transaction are amortising sequentially, with the
rated collateralised notes supported by unrated collateralised
notes. The amortisation allows for a gradual increase in CE,
supporting today's affirmations and upgrades.
RWP Resolved
The class B, D, E and F notes were placed on RWP following the
retirement by Fitch of coronavirus-related additional stress
analysis scenario (see 'Fitch Retires UK and European RMBS
Coronavirus Additional Stress Scenario Analysis, except for UK
Non-Conforming'). The retirement of its additional stress scenario
analysis, which had been applied in conjunction with its UK RMBS
Rating Criteria for UK prime pools, resulted in an improved
weighted average foreclosure frequency (FF) in the pool.
This, together with the accumulated CE and stable asset performance
in the pool, led to the upgrades of the collateralised notes.
Stable Performance; Limited Payment Holidays
The transaction has seen some increase in late-stage arrears, with
three-month plus arrears just below 6% at end-June 2021, which is
around 1% greater than 12 months earlier. The amount of early-stage
arrears has been stable.
Additionally, loans in payment holidays were just 0.4% of the
collateral portfolio as of end-June 2021, having decreased from the
peak seen in 2020. This has, however, not resulted in any
significant deterioration in asset performance. Fitch does not
expect payment holidays to increase further given the deadline for
applying to the scheme has now passed and the loosening of
coronavirus-containment restrictions. The reduction in the level of
payment holidays also benefits the transaction through increased
available revenue and thus excess spread supporting the ratings of
the notes.
Payment Interruption Risk Constrains Ratings
The class C to F notes do not have access to a dedicated source of
liquidity and are therefore capped at 'A+sf' per Fitch's criteria.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative
rating action/downgrade:
-- The transactions' performance may be affected by changes in
market conditions and economic environment. Weakening asset
performance is strongly correlated to increasing levels of
delinquencies and defaults that could reduce CE available to
the notes.
-- Additionally, unanticipated declines in recoveries could also
result in lower net proceeds, which may make certain note
ratings susceptible to negative rating actions, depending on
the extent of the decline in recoveries. Fitch conducts
sensitivity analyses by stressing both a transaction's base
case FF and recovery rate (RR) assumptions, and examining the
rating implications on all classes of issued notes. A 15%
increase in weighted average FF (WAFF) and a 15% decrease in
WARR indicate downgrades of up to five notches.
Factor that could, individually or collectively, lead to positive
rating action/upgrade:
-- Stable to improved asset performance, driven by stable
delinquencies and defaults, would lead to increasing CE and,
potentially, upgrades. A decrease in WAFF of 15% and an
increase in WARR of 15% indicate upgrades of up to four
notches.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance
transactions have a best-case rating upgrade scenario (defined as
the 99th percentile of rating transitions, measured in a positive
direction) of seven notches over a three-year rating horizon; and a
worst-case rating downgrade scenario (defined as the 99th
percentile of rating transitions, measured in a negative direction)
of seven notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges
from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings
are based on historical performance.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Prior to the transaction closing, Fitch reviewed the results of a
third-party assessment conducted on the asset portfolio information
and concluded that there were no findings that affected the rating
analysis.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
Towd Point Mortgage Funding - Granite 4 has an ESG Relevance Score
of '4' for Customer Welfare - Fair Messaging, Privacy & Data
Security due to a high proportion of interest-only loans in legacy
owner-occupied mortgages, which has a negative impact on the credit
profile, and is relevant to the ratings in conjunction with other
factors.
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 the way in which they are being
managed by the entity.
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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
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