/raid1/www/Hosts/bankrupt/TCREUR_Public/240328.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, March 28, 2024, Vol. 25, No. 64
Headlines
B E L G I U M
TEAM.BLUE FINCO: S&P Affirms 'B' Rating Despite Additional Debt
VAN HOOL: Bankruptcy Now Unavoidable, Crisis Manager Says
F R A N C E
EUTELSAT COMMUNICATIONS: Moody's Affirms Ba3 CFR, Outlook Negative
EUTELSAT SA: S&P Affirms 'B' Issuer Credit Ratings, Outlook Stable
G E R M A N Y
FORTUNA CONSUMER 2022-1: Fitch Ups Rating on Class F Notes to 'BB-'
I R E L A N D
AVOCA CLO XXIX: Fitch Assigns 'B-sf' Final Rating to Class F Notes
BAIN CAPITAL 2017-1: Moody's Cuts EUR10.5MM F Notes Rating to B3
CVC CORDATUS: Fitch Assigns 'B+sf' Final Rating to Class F Notes
FIDELITY GRAND 2022-1: S&P Assigns B-(sf) Rating on Cl. F-R Notes
PENTA CLO 16: S&P Assigns B- (sf) Rating to Class F Notes
PERRIGO CO: S&P Downgrades ICR to 'BB-', Outlook Stable
I T A L Y
NEOPHARMED GENTILI: Moody's Assigns 'B3' CFR, Outlook Stable
NEOPHARMED GENTILI: S&P Assigns Prelim 'B' ICR on Debt Refinancing
K A Z A K H S T A N
AB KAZAKHSTAN: Fitch Hikes LongTerm IDR to 'B', Outlook Positive
L U X E M B O U R G
BL CONSUMER II: S&P Assigns B- (sf) Rating to Class F-Dfrd Notes
MILLICOM INT'L: Moody's Rates New Sr. Unsecured Global Notes 'Ba3'
WINTERFELL FINANCING: Fitch Affirms 'B' IDR, Outlook Now Stable
N E T H E R L A N D S
BME GROUP: Moody's Affirms 'B2' CFR & Alters Outlook to Negative
BME GROUP: S&P Alters Outlook to Negative, Affirms 'B' ICR
NOBIAN FINANCE: Moody's Affirms 'B2' CFR, Alters Outlook to Pos.
SCHOELLER PACKAGING: S&P Affirms 'CCC+' ICR, Alters Outlook to Pos.
VEON LTD: Fitch Assigns 'BB-' LongTerm IDR, Outlook Negative
S E R B I A
DANUBE RIVERSIDE: Millenium Team Buys Business, Hotel Jugoslavija
S P A I N
SANTANDER CONSUMER 2016-2: Moody's Ups Rating on E Notes from Ba1
S W I T Z E R L A N D
ESPRIT: Swiss Unit Collapses, Branches Face Closure
T U R K E Y
AKBANK TAS: Fitch Puts 'CCC' Final LongTerm Rating, On Watch Pos.
[*] Fitch Hikes LongTerm IDR on 11 Bank-Owned Turkish NBFIs to 'B'
[*] Fitch Raises LT FC IDRs on 17 Turkish Banks to 'B'
U N I T E D K I N G D O M
BRITISH TELECOMMUNICATIONS: Moody's Rates New Hybrid Notes 'Ba1'
BT GROUP: S&P Rates Junior Subordinated Hybrid Securities 'BB+'
CURZON MORTGAGES: Fitch Affirms B+sf Rating, Alters Outlook to Neg.
EM MIDCO 2: Moody's Affirms 'B3' CFR & Alters Outlook to Positive
FOURPURE: Applies for CVA to Avert Liquidation
GLENALMOND GROUP: Goes Into Administration
GROSVENOR SQUARE 2023-1: S&P Lowers E-Dfrd Notes Rating to 'B+'
OPTIONS SKILLS: Goes Into Liquidation, Ceases Operations
STRATTON MORTGAGE 2024-2: S&P Assigns B (sf) Rating to Cl. F Notes
THAMES WATER: Holds Crunch Meeting, Seeks GBP750MM Lifeline
VICTORIA PLC: Moody's Affirms 'B2' CFR, Alters Outlook to Negative
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B E L G I U M
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TEAM.BLUE FINCO: S&P Affirms 'B' Rating Despite Additional Debt
---------------------------------------------------------------
S&P Global Ratings affirmed its 'B' rating on Belgium-Based
webhosting provider team.blue Finco S.a.r.l. and its senior secured
debt, including the proposed EUR250 million add-on.
The stable outlook indicates that S&P expects revenue growth of
10%-13% in 2024, and sound EBITDA margin expansion. As such, S&P
anticipates that adjusted leverage will stay under 7.5x and FOCF to
debt close to or above 5%.
European web hosting and digital solutions provider team.blue plans
to issue a EUR250 million add-on to its first-lien term loan; S&P
expect it will use the proceeds to repay the holdco payment-in-kind
(PIK) facility (including accrued interests) and increase the cash
on balance sheet.
S&P said, "The proposed EUR250 million first-lien senior secured
add-on is largely credit neutral. We expect team.blue will use the
proceeds of the add-on to repay the holdco PIK facility (about
EUR205 million, including all accrued interests) and add about
EUR45 million of cash to the balance sheet (EUR147 million at the
end of 2023). We believe this enlarged cash balance will further
support team.blue's acquisition strategy. With this transaction,
team.blue's adjusted gross debt will increase by about EUR45
million, resulting in adjusted debt to EBITDA falling to about 7.2x
in 2024, from about 8.0x in 2023. We expect the company's cash
interest burden will increase by about EUR12 million after
repayment of a compounding instrument with a loan paying cash
interest, resulting in FOCF to debt of 5% in 2024. However, we
believe that with this transaction team.blue will improve its
medium-term deleveraging profile, through the redemption of all
compounding loans, while increasing its cash balance that we
believe will fund future organic and inorganic EBITDA growth.
"We anticipate team.blue's sound revenue growth will continue in
2024. The company reported organic revenue growth of about 13% in
2023, thanks to meaningful price increases, cross-selling, and
further penetration of European small and midsize enterprise (SME)
web hosting markets. We expect the strong growth momentum will
continue in 2024, despite relatively muted economic conditions.
This largely stems from the company's high recurring revenue of
more than 95% and a net retention rate of 104%, supporting earnings
stability. Furthermore, team.blue's strategic expansion into add-on
services, expanding its digital product offering, provides
additional cross-selling opportunities, supporting growth and
profitability improvement, and enhances customer loyalty, as
evidenced by the company's steadily increasing net retention rate.
"The acquisition appetite continues to constrain our ratings. As
part of a fast-growing and fragmented market, team.blue has a
relatively large appetite for acquisitions to accelerate its
revenue growth and solidify its market position. In our view, this
will limit the company's pace of deleveraging through EBITDA
growth. Nonetheless, we think team.blue's bolt-on acquisition
strategy provides additional functionalities that complement its
core mass hosting offering or expand its presence in the markets,
which can enhance its value proposal to customers and support
growth. As a result, we think the sponsor and the founders will
continue limiting dividend payments and instead prioritize
acquisitions and growth.
"The stable outlook indicates our expectation that strong revenue
growth of 10%-13% over 2024 and sound EBITDA margin expansion on
the back of lower exceptional costs will largely offset the
company's higher gross debt burden to fund its acquisitive
strategy. We expect adjusted debt to EBITDA will stay between 7.0x
and 7.5x and FOCF to debt will be close to 5% in 2024."
Downside scenario
S&P said, "We could lower the rating if adjusted debt to EBITDA
remained above 7.5x or if FOCF to debt fell below 5% for a
prolonged period. We think this could occur if team.blue made
additional large, debt-funded acquisitions or paid large
debt-funded dividends. Alternatively, if weak macroeconomic
conditions caused more SMEs to fail, the company could experience
higher customer turnover."
Upside scenario
S&P could raise the rating over the longer term if team.blue
reduced adjusted debt to EBITDA to below 5.5x and achieved FOCF to
debt of close to 10% on the back of EBITDA growth.
VAN HOOL: Bankruptcy Now Unavoidable, Crisis Manager Says
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Sustainable Bus reports that Van Hool's bankruptcy is now
unavoidable, crisis manager Marc Zwaaneveld, who was appointed in
early 2024, told in an interview with De Standaard.
Van Hool announced the plan to stop production of city buses (and
relocating business in Macedonia) on March 11, Sustainable Bus
relates. Later on, the company asked for protection from
creditors, Sustainable Bus recounts. On March 26, Van Hool sent
workers home, Sustainable Bus discloses.
"There is still money until March 31 (and payment to workers is
assured until that day), after that the coffers will be completely
empty. The only possibility to save jobs and know-how is a restart
with an acquirer after the bankruptcy", is reported in De
Standaard's interview, Sustainable Bu notes. The news is that
there are two interested parties: one is Dutch bus manufacturer VDL
(in association with a partner that is kept confidential), while
the second candidate is Dumarey Group (that in late 2023 took over
Mellor parent company WN VTech), Sustainable Bu discloses.
According to Flemish newspaper 'De Tijd', the debt burden at Van
Hool amounts to almost EUR400 million, Sustainable Bus relates.
And as reported on the same media, that debt burden is solely at
the expense of the limited liability company Van Hool, according to
Sustainable Bus. However, part of the family, with the family
holding company Immoroc, still owns the factory buildings and
factory sites in both Lier (near Antwerp, Belgium) and Macedonia,
Sustainable Bus notes. These fixed assets are not covered by the
impending bankruptcy and this complicates the takeover and
relaunch, Sustainable Bus states.
The goal of the crisis manager was to relaunch the company through
a recovery plan, Sustainable Bus says. "Banks and the government
had to bridge, partly with fresh capital -- still Zwaaneveld at the
Belgian media. Only after a few years, when the company would be
healthy again, would an external party have to be found. The
success of my plan did not depend on whether or not I would find an
industrial party. In my scenario, that would have to be sought
only later".
Something went wrong, and Zwaaneveld attributed it to Van Hool
family: "I knew that the Van Hool family was not aligned before I
came here. But I did not know the impact of the inheritance issue.
The risk was that new equity in Van Hool would drain away to the
descendants", he said. And added: "The government and the banks
really had the intention to reach a solution. The plan before them
was very challenging but feasible. I bet heavily on that. The
family put a stop to it. So the question is now irrelevant."
Van Hool NV is a Belgian family-owned coachbuilder and manufacturer
of buses, coaches, trolleybuses, and trailers. Most of the buses
and coaches are built entirely by Van Hool, with engines and axles
sourced from Caterpillar, Cummins, DAF and MAN and gearboxes from
ZF or Voith.
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F R A N C E
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EUTELSAT COMMUNICATIONS: Moody's Affirms Ba3 CFR, Outlook Negative
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Moody's Ratings has affirmed the Ba3 corporate family rating and
the Ba3-PD probability of default rating of Eutelsat Communications
SA (Eutelsat Communications), a leading satellite operator; and has
affirmed the Ba3 ratings of the existing senior unsecured bonds due
in October 2025 and July 2027 issued by its main operating
subsidiary Eutelsat SA (Eutelsat). Concurrently, Moody's assigned a
Ba3 rating to the proposed EUR600 million senior unsecured notes
due 2029 to be issued by Eutelsat SA; and assigned a Ba3 rating to
the EUR600 million senior unsecured bond due in October 2028 issued
by Eutelsat SA. The outlook for both entities remains negative.
Proceeds from the bond issuance will be used to partially refinance
Eutelsat 's EUR800 million senior unsecured notes due October
2025.
While the transaction is leverage neutral, it will push a near term
debt maturity into 2029, resolving an upcoming liquidity need.
However, the interest rate on the new debt will be higher than that
of debt that is being retired, marginally weakening free cash flow"
says Ernesto Bisagno, a Moody's VP-Senior Credit Officer and lead
analyst for Eutelsat.
RATINGS RATIONALE
Eutelsat Communications's Ba3 rating reflects the company's strong
market position as the third-largest fixed satellite services (FSS)
operator globally; its status as a convergent LEO/GEO operator; its
order backlog, which covers 3.1x its revenue; its strong
profitability.
The rating is constrained by the weakened credit metrics following
the merger with OneWeb; the execution risk of the commercial
integration and capital spending plan; and the difficult market
conditions for satellite operators with the ongoing revenue
contraction in the video segment partially offset by stronger
connectivity.
Moody's expects Eutelsat Communications SA's Moody's-adjusted
debt/EBITDA to remain high at around 5.2x in 2024, in line with
2023, and only decline towards 4.7x by 2026, driven by higher
EBITDA. The company remains committed to its 3x net reported
leverage target over the medium term. However, FCF will remain
negative over 2024-27 because of the significant increase in
capital spending related to OneWeb's Gen-2 constellation, which,
however, is largely uncommitted.
LIQUIDITY
At December 2023, liquidity was underpinned by cash and cash
equivalents of around EUR897 million. The new EUR600 million bond
will address the refinancing of the EUR800 million bond due in
October 2025.
Moody's understands that the company will also extend the EUR450
million revolving credit facility (RCF) at Eutelsat SA maturing in
September 2025 by three years (plus two extension options at
lenders discretion), while it will cancel the EUR200 million RCF
due in September 2025 which was put in place during the pandemic as
an extraordinary measure. The company also maintains access to an
RCF of EUR100 million at Eutelsat Communications SA due in June
2027.
Eutelsat SA's access to committed bank facilities is restricted by
a net leverage covenant set at net debt/EBITDA below 4.0x for the
facilities at the Eutelsat SA level; while at the Eutelsat
Communications level the net leverage covenant has been relaxed to
4.75x until 2024, and 4.5x until 2025. While Moody's expects
sufficient headroom over the next 12 months, the cushion at
Eutelsat Communications has reduced because of the increased
leverage.
In addition, OneWeb will need to raise additional funding to cover
the growth capex requirements, resulting in Eutelsat Communications
expected consolidated negative FCF of EUR400 million each year over
2024-27 (with a funding peak in 2025). However, Moody's understands
that the majority of the capex related to the Gen-2 constellation
is uncommitted and can be curtailed if needed.
STRUCTURAL CONSIDERATIONS
Eutelsat SA is the main operating company of the Eutelsat
Communications SA group, where the Corporate Family Rating (CFR) is
assigned. The bonds issued at Eutelsat SA are rated Ba3, in line
with the CFR, as the vast majority of the group's debt is sitting
at Eutelsat SA's level.
The proposed bond includes certain covenants that restrict the
ability of Eutelsat SA to upstream cash outside its newly created
restricted group. This mainly includes limitation on restricted
payments if net leverage is above 2.75x, with a basket of EUR1.4
billion for OneWeb capex, subject to meeting a pro-forma leverage
of 3.25x.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects Eutelsat Communications's high
leverage and the fact that Eutelsat Communications will remain FCF
negative over 2024-27, which will require significant funding
needs.
The negative outlook also reflects the execution risk associated
with the merger with OneWeb as highlighted by the revised 2024
guidance, with potential additional downside risks to Moody's
expectations, in particular related to Eutelsat's ability to scale
up the OneWeb business and to restore earnings growth.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure over the next 12-18 months is unlikely but
would require an improvement in Eutelsat's operating performance
owing to a combination of strong revenue and earnings growth, along
with improved free cash flow (FCF), and maintenance of strong
liquidity. Quantitatively, a rating upgrade would require its
Moody's-adjusted gross debt/EBITDA ratio to decline below 4.25x,
and sustained positive FCF generation.
Further downward rating pressure would develop if Eutelsat's EBITDA
does not recover in line with Moody's current expectation and
leverage does not reduce from the current high levels, with its
Moody's-adjusted gross debt/EBITDA ratio exceeding 4.75x on a
sustained basis, or if its liquidity weakens given the significant
funding needs that the company will face over the next 2 to 3
years.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Communications
Infrastructure published in February 2022.
COMPANY PROFILE
Eutelsat SA is the main operating subsidiary of Eutelsat
Communications SA, which was created in 1977 and is headquartered
in Paris (Eutelsat). Eutelsat is one of Europe's leading satellite
operators and one of the top-three global providers of FSS. The
company's fleet of 36 geostationary satellites reaches up to 150
countries in Europe, Africa, Asia and the Americas. Eutelsat
generates around 60% of its business from the video segment.
EUTELSAT SA: S&P Affirms 'B' Issuer Credit Ratings, Outlook Stable
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S&P Global Ratings affirmed its 'B' long- and short-term issuer
credit ratings on France-based satellite operator Eutelsat S.A.
and the 'B+' issue rating on the proposed EUR600 million senior
unsecured notes and the existing EUR1.2 billion senior unsecured
notes. The recovery rating on the notes is '2' (estimated recovery:
80%).
The stable outlook on Eutelsat mirrors that on Eutelsat Group and
reflects S&P's view that the parent company's liquidity will remain
adequate over the next 12 months, despite significant cash outflows
related to OneWeb.
Eutelsat is a leading global satellite operator with superior
profitability and high cash flow generation that operates in a
highly competitive market. S&P said, "Our view of the company's
business risk profile is underpinned by its leading market position
as the third-largest fixed satellite service provider globally,
exposure to diversified end markets, and with EBITDA margin of 70%.
On the other hand, the company operates in an industry where the
competitive landscape is becoming more intense with large
geostationary (GEO) satellite operators like Viasat increasing
their network capacity, SES expanding into medium Earth orbit,
Starlink's push into the enterprise segment with low-Earth-orbit
(LEO) constellations, and other upcoming entry of deep-pocketed
players like Amazon Kuiper. Intensifying competition in the
satellite communications market could undermine Eutelsat's growth
prospects. In parallel, the fast expansion of fiber and mobile
networks globally could also tighten the total addressable market
for satellite operators in certain end markets like broadband and
video. We think the increasing competition will likely squeeze
prices. This, in conjunction with secular decline trend of video
broadcasting, where Eutelsat generates about 60% of revenue, weighs
negatively on our overall business risk profile assessment. We have
observed revenue growth stabilization, driven by leveraging
high-through-put GEO satellites in growing business to business
verticals, including mobile or fixed connectivity and increasing
exposure to regions with strong video growth." Along with the
strong EUR3.2 billion backlogs (as of Dec. 31, 2023) with a high
proportion coming from the connectivity segment, this could
potentially support the return to revenue growth.
Eutelsat's leverage will remain within its historical band despite
what S&P expects will be negative discretionary cash flow (DCF).
Cash upstreamed to partially finance the roll-out of OneWeb
Generation 2 (Gen-2) LEO constellation investments will lead to
negative DCF over the coming years and will drain Eutelsat's cash
balance. The company will use a significant portion of its cash
flow generation to partially finance the roll out of OneWeb Gen-2.
This results in negative reported DCF of about EUR180 million in
fiscal 2024 (ending June 30, 2024) and EUR50 million in fiscal
2025. With cash balance of EUR856 million as of Dec. 31, 2023, the
company has capacity to address it without burdening its balance
sheet with new debt. This, along with the proposed full refinancing
of the EUR800 million senior secured bonds maturing in October 2025
with cash on hand and new debt, confirms the company's financial
policy. S&P said, "Therefore, we foresee that Eutelsat's S&P Global
Ratings-adjusted debt to EBITDA will remain flat at about 3.0x,
albeit at the higher end, in fiscal 2024 and fiscal 2025, a level
that however remains consistent with the company's historical
leverage band of 2.5x-3.0x. Having said that, we also understand
that the new credit terms allow Eutelsat to directly or indirectly
finance OneWeb investments up to a maximum amount of EUR1.4 billion
and subject to pro-forma net leverage below 3.25x."
The rating on Eutelsat is capped by the parent company's credit
quality. S&P said, "The parent company's creditworthiness is a key
credit factor in our rating on Eutelsat, since we assess Eutelsat
as a core and noninsulated subsidiary of Eutelsat Group. Eutelsat
Group is the controlling owner of Eutelsat and highly depends on
Eutelsat's cash flow to service its EUR400 million debt. While
Eutelsat's stand-alone credit profile (SACP), at 'bb', exceeds that
of the parent, we cap our ratings on Eutelsat at the level of the
group credit profile (GCP) because we think there is a reasonable
likelihood that financial stress within the group could negatively
impact Eutelsat's credit quality."
The stable outlook mirrors that on Eutelsat Group. This in turn
reflects S&P's view that the group's liquidity will remain adequate
over the next 12 months, despite significant cash outflows for
OneWeb investments.
Downside scenario
S&P said, "We could downgrade Eutelsat if we downgrade Eutelsat
Group. We could lower the rating if the group's liquidity profile
weakened due to insufficient refinancing or a higher FOCF outflow
related to OneWeb than we expect in our base case.
"We could revise down our 'bb' SACP assessment if Eutelsat's
financial policy becomes more aggressive, management considers
sizable debt-financed cash upstream to shareholders and/or
investments to OneWeb, or operating performance is weaker than we
expect. If adjusted debt to EBITDA surpasses 3.0x for a prolonged
period or funds from operations (FFO) to debt reduces significantly
below 20% and substantially negative DCF could weigh on the
rating."
Upside scenario
S&P could upgrade Eutelsat if it upgrades Eutelsat Group. S&P sees
limited rating upside at this stage, however, considering the
uncertainties about the revenue from LEO services and the company's
cash flows and liquidity profile. S&P could, however, raise the
rating if the company significantly outperforms our base case,
supported by the ramp-up of its LEO services, leading to:
-- A stronger business risk profile;
-- A credible path toward consistently positive FOCF; and
-- Adjusted leverage of sustainably below 5x.
S&P could revises the SACP upward if adjusted debt to EBITDA
reduces significantly below 3.0x, FFO to debt improves to above
30%, Eutelsat has substantially positive DCF and assuming the
stand-alone business risk profile of Eutelsat is not weakened
further by industry developments.
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G E R M A N Y
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FORTUNA CONSUMER 2022-1: Fitch Ups Rating on Class F Notes to 'BB-'
-------------------------------------------------------------------
Fitch Ratings has upgraded Fortuna Consumer Loan ABS 2022-1
Designated Activity Company's class B to F notes, as detailed
below.
Entity/Debt Rating Prior
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Fortuna Consumer
Loan ABS 2022-1
B XS2473716723 LT AAAsf Upgrade AA+sf
C XS2473717028 LT AA+sf Upgrade Asf
D XS2473717457 LT A+sf Upgrade BBBsf
E XS2473717614 LT BBB-sf Upgrade BBsf
F XS2473718000 LT BB-sf Upgrade B-sf
TRANSACTION SUMMARY
The transaction is a true-sale securitisation of a static pool of
unsecured consumer loans sold by auxmoney Investments Limited. The
securitised consumer loan receivables are derived from loan
agreements entered into between Süd-West-Kreditbank Finanzierung
GmbH (SWK) and individuals located in Germany and brokered by
auxmoney GmbH (auxmoney) via its online lending platform.
KEY RATING DRIVERS
Sequential Amortisation Drives Upgrades: The class A to G notes
have been amortising sequentially since the class G principal
deficiency ledger (PDL) trigger was breached in January 2023. Thus,
credit enhancement (CE) has continued to increase for the class A
to F notes and ranged between 9.4% and 96.4% (from between 6.2% and
47% at closing) as of the January 2024 payment date, with the class
A notes recently getting paid in full. The CE build-up drives the
notes' upgrades.
Performance in Line with Expectations: Observed defaults are
broadly in line with its expectations, considering that defaults
accumulate early in the life of the transaction based on historical
data from auxmoney. Recoveries are also in line with its
expectations. The unrated class G notes have an outstanding amount
of EUR2.3 million on the PDL but this has been largely stable for
the last five months.
Taking into account the transaction's performance, the portfolio
composition, as well as its expectation of mild challenges for the
German economy, Fitch continues to assume a default base case of
12.8% and a 'AAA' default multiple of 3.8x. Base case recoveries
and 'AAA' haircut remain at 35% and 60%, respectively.
Servicing Continuity Risk Addressed: CreditConnect GmbH, a
subsidiary of auxmoney, is the transaction's servicer. Loancos GmbH
acts as back-up servicer since closing, reducing the risk of
servicing discontinuity. The back-up servicing agreement covers two
scenarios: one where CreditConnect is replaced; and one where
CreditConnect and SWK no longer perform their contractual duties.
The high level of standby arrangements combined with a liquidity
reserve reduce the risk of payment interruptions of senior expenses
and interest on the rated notes.
The KRDs listed in the applicable sector criteria, but not
mentioned above, are not material to this rating action.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
Unanticipated increases in default rates or decreases in recovery
rates producing larger losses than its current assumptions could
result in negative rating action on the notes. The sensitivities
below describe the model-implied impact of a change in one of these
input variables, respectively for the class B/C/D/E/F notes:
Increase default rate by 10%:
'AAAsf'/'AA+sf'/'Asf'/'BB+sf'/'BB-sf'
Increase default rate by 25%:
'AAAsf'/'AA-sf'/'BBB+sf'/'BBsf'/'Bsf'
Increase default rate by 50%: 'AA+sf'/'Asf'/'BBBsf'/'BB-sf'/'NRsf'
Reduce recovery rates by 10%:
'AAAsf'/'AA+sf'/'Asf'/'BBB-sf'/'BB-sf'
Reduce recovery rates by 25%:
'AAAsf'/'AA+sf'/'Asf'/'BB+sf'/'BB-sf'
Reduce recovery rates by 50%: 'AAAsf'/'AA+sf'/'Asf'/'BB+sf'/'B+sf'
Increase default and decrease recovery rates by 10%:
'AAAsf'/'AAsf'/'Asf'/'BB+sf'/' BB-sf'
Increase default and decrease recovery rates by 25%:
'AAAsf'/'AA-sf'/'BBB+sf'/'BBsf'/'CCCsf'
Increase default and decrease recovery rates by 50%:
'AA+sf'/'A-sf'/'BBB-sf'/'CCCsf'/'NRsf'
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Lower defaults and smaller losses could lead to positive rating
action. For example, a simultaneous decrease of defaults and
increase of recoveries by 25% would have the following impact on
the class B/C/D/E/F notes:
'AAAsf'/'AAAsf'/'AA+sf'/'A-sf'/'BBBsf'
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
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
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I R E L A N D
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AVOCA CLO XXIX: Fitch Assigns 'B-sf' Final Rating to Class F Notes
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Fitch Ratings has assigned Avoca CLO XXIX DAC's final ratings, as
detailed below.
Entity/Debt Rating Prior
----------- ------ -----
Avoca CLO XXIX DAC
A-Loan LT AAAsf New Rating AAA(EXP)sf
A-Note XS2756960568 LT AAAsf New Rating AAA(EXP)sf
B XS2756960725 LT AAsf New Rating AA(EXP)sf
C XS2756961376 LT Asf New Rating A(EXP)sf
D XS2756961533 LT BBB-sf New Rating BBB-(EXP)sf
E XS2756961707 LT BB-sf New Rating BB-(EXP)sf
F XS2756961962 LT B-sf New Rating B-(EXP)sf
Subordinated Note
XS2756962184 LT NRsf New Rating NR(EXP)sf
TRANSACTION SUMMARY
Avoca CLO XXIX DAC is a securitisation of mainly senior secured
obligations (at least 90%) with a component of corporate-rescue
loans, senior unsecured, mezzanine, second-lien loans and
high-yield bonds.
Net proceeds from the note issuance has been used to fund a
portfolio with a target par of EUR400 million. The portfolio is
actively managed by KKR Credit Advisors (Ireland) Unlimited Company
(KKR). The collateralised loan obligation (CLO) has a 4.6-year
reinvestment period and an 8.5-year weighted average life (WAL)
test.
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors at 'B'/'B-'. The Fitch weighted
average rating factor (WARF) of the identified portfolio is 25.6.
High Recovery Expectations (Positive): At least 90% of the
portfolio comprises senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch weighted
average recovery rate (WARR) of the identified portfolio is 61%.
Diversified Portfolio (Positive): The transaction includes two
Fitch matrices effective at closing corresponding to a top-10
obligor concentration limit at 20%, fixed-rate asset limits at 5%
or 12.5%, and an 8.5-year WAL. The transaction also includes
various concentration limits, including a maximum exposure to the
three-largest Fitch-defined industries in the portfolio at 40%.
These covenants ensure that the asset portfolio will not be exposed
to excessive concentration.
Portfolio Management (Neutral): The transaction has a 4.6-year
reinvestment period and includes reinvestment criteria similar to
those of other European transactions. Fitch's analysis is based on
a stressed portfolio with the aim of testing the robustness of the
transaction structure against its covenants and portfolio
guidelines.
Cash Flow Modelling (Positive): The WAL used for the transaction's
Fitch-stressed portfolio analysis is 12 months less than the WAL
covenant, to account for structural and reinvestment conditions
after the reinvestment period, including passing the
over-collateralisation (OC) and Fitch 'CCC' limitation tests, among
other things. This, combined with Fitch's loan pre-payment
expectations, ultimately reduces the maximum possible risk horizon
of the portfolio.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A 25% increase in the mean default rate (RDR) and a 25% decrease in
the recovery rate (RRR) across all the ratings of the identified
portfolio would lead to a downgrade of no more than one notch for
the class B, C, D and E notes, and to below 'B-sf' for the class F
notes.
Downgrades, which are based on the identified portfolio, may occur
if the loss expectation is larger than initially assumed due to
unexpectedly high levels of defaults and portfolio deterioration.
Owing to the identified portfolio's better metrics and shorter life
than the Fitch-stressed portfolio, the class F notes display a
rating cushion of three notches, the class B, D and E notes of two
notches, and the class C notes of one notch.
Should the cushion between the identified portfolio and the
Fitch-stressed portfolio be eroded, either due to manager trading
or negative portfolio credit migration, a 25% increase in the mean
RDR and a 25% decrease in the RRR across all the ratings of the
Fitch-stressed portfolio, would lead to downgrades of up to four
notches for the rated notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction in the RDR and a 25% increase in the RRR across all
the ratings of the Fitch-stressed portfolio would lead to upgrades
of up to four notches for the rated notes, except for the 'AAAsf'
notes.
During the reinvestment period, upgrades, which are based on the
Fitch-stressed portfolio, may occur on better-than-expected
portfolio credit quality and a shorter remaining WAL test, leading
to the ability of the notes to withstand larger-than-expected
losses for the remaining life of the transaction.
After the end of the reinvestment period, upgrades, except for the
'AAAsf' notes, may occur on stable portfolio credit quality and
deleveraging, leading to higher credit enhancement and excess
spread being available to cover losses in the remaining portfolio.
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
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
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.
BAIN CAPITAL 2017-1: Moody's Cuts EUR10.5MM F Notes Rating to B3
----------------------------------------------------------------
Moody's Ratings has taken a variety of rating actions on the
following notes issued by Bain Capital Euro CLO 2017-1 Designated
Activity Company:
EUR22,000,000 Class C Senior Secured Deferrable Floating Rate
Notes due 2030, Upgraded to Aa2 (sf); previously on Sep 15, 2023
Upgraded to Aa3 (sf)
EUR17,500,000 Class D Senior Secured Deferrable Floating Rate
Notes due 2030, Upgraded to A3 (sf); previously on Sep 15, 2023
Affirmed Baa1 (sf)
EUR10,500,000 Class F Senior Secured Deferrable Floating Rate
Notes due 2030, Downgraded to B3 (sf); previously on Sep 15, 2023
Affirmed B2 (sf)
Moody's has also affirmed the ratings on the following notes:
EUR206,500,000 (Current outstanding amount EUR125,304,048) Class A
Senior Secured Floating Rate Notes due 2030, Affirmed Aaa (sf);
previously on Sep 15, 2023 Affirmed Aaa (sf)
EUR31,500,000 Class B-1 Senior Secured Floating Rate Notes due
2030, Affirmed Aaa (sf); previously on Sep 15, 2023 Upgraded to Aaa
(sf)
EUR15,000,000 Class B-2 Senior Secured Fixed Rate Notes due 2030,
Affirmed Aaa (sf); previously on Sep 15, 2023 Upgraded to Aaa (sf)
EUR22,500,000 Class E Senior Secured Deferrable Floating Rate
Notes due 2030, Affirmed Ba2 (sf); previously on Sep 15, 2023
Affirmed Ba2 (sf)
Bain Capital Euro CLO 2017-1 Designated Activity Company, issued in
October 2017, is a collateralised loan obligation (CLO) backed by a
portfolio of mostly high-yield senior secured European loans. The
portfolio is managed by Bain Capital Credit, Ltd. The transaction's
reinvestment period ended in October 2021.
RATINGS RATIONALE
The upgrades on the ratings on the Class C and D notes are
primarily a result of the deleveraging of the senior notes
following amortisation of the underlying portfolio since the last
rating action in September 2023 and a shorter weighted average life
of the portfolio which reduces the time the rated notes are exposed
to the credit risk of the underlying portfolio.
The Class A notes have paid down by approximately EUR34.6 million
(16.8%) since the last rating action in September 2023 and EUR81.2
million (39.3%) since closing. As a result of the deleveraging,
over-collateralisation (OC) ratios have increased for Class A,
Class B, Class C and Class D notes. According to the trustee report
dated February 2024 [1] the Class A/B, Class C and Class D OC
ratios are reported at 146.31%, 129.71% and 118.96% compared to
August 2023 [2] levels of 140.64%, 127.09% and 118.04%,
respectively.
The rating downgrade on the Class F notes is due to the
deterioration of Class F OC ratio as result of defaults and par
losses in the CLO's portfolio since the last rating action in
September 2023. Class F OC test is failing as of February 2024 [1]
trustee report. In addition, the rating downgrade on the Class F is
also the result of a shorter weighted average life of the portfolio
which leads to reduced time for excess spread to cover shortfalls
caused by future defaults.
The affirmations on the ratings on the Class A, B-1, B-2 and E
notes are primarily a result of the expected losses on the notes
remaining consistent with their current rating levels, after taking
into account the CLO's latest portfolio, its relevant structural
features and its actual over-collateralisation ratios.
Key model inputs:
The key model inputs Moody's uses in its analysis, such as par,
weighted average rating factor, diversity score and the weighted
average recovery rate, are based on its published methodology and
could differ from the trustee's reported numbers.
In its base case, Moody's used the following assumptions:
Performing par and principal proceeds balance: EUR247.4m
Defaulted Securities: EUR13.5m
Diversity Score: 52
Weighted Average Rating Factor (WARF): 2831
Weighted Average Life (WAL): 3.27 years
Weighted Average Spread (WAS) (before accounting for Euribor
floors): 3.70%
Weighted Average Coupon (WAC): 4.19%
Weighted Average Recovery Rate (WARR): 43.75%
Par haircut in OC tests and interest diversion test: 0%
The default probability derives from the credit quality of the
collateral pool and Moody's expectation of the remaining life of
the collateral pool. The estimated average recovery rate on future
defaults is based primarily on the seniority of the assets in the
collateral pool. In each case, historical and market performance
and a collateral manager's latitude to trade collateral are also
relevant factors. Moody's incorporates these default and recovery
characteristics of the collateral pool into its cash flow model
analysis, subjecting them to stresses as a function of the target
rating of each CLO liability it is analysing.
Moody's notes that the March 2024 trustee report was published at
the time it was completing its analysis of the February 2024 data.
Key portfolio metrics such as WARF, diversity score, weighted
average spread and life, and OC ratios exhibit little or no change
between these dates.
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 2021.
Counterparty Exposure:
The rating action took into consideration the notes' exposure to
relevant counterparties, such as account bank, using the
methodology "Moody's Approach to Assessing Counterparty Risks in
Structured Finance methodology" published in October 2023. Moody's
concluded the ratings of the notes are not constrained by these
risks.
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.
Additional uncertainty about performance is due to the following:
-- Portfolio amortisation: The main source of uncertainty in this
transaction is the pace of amortisation of the underlying
portfolio, which can vary significantly depending on market
conditions and have a significant impact on the notes' ratings.
Amortisation could accelerate as a consequence of high loan
prepayment levels or collateral sales by the collateral manager or
be delayed by an increase in loan amend-and-extend restructurings.
Fast amortisation would usually benefit the ratings of the notes
beginning with the notes having the highest prepayment priority.
-- Recovery of defaulted assets: Market value fluctuations in
trustee-reported defaulted assets and those Moody's assumes have
defaulted can result in volatility in the deal's
over-collateralisation levels. Further, the timing of recoveries
and the manager's decision whether to work out or sell defaulted
assets can also result in additional uncertainty. Moody's analysed
defaulted recoveries assuming the lower of the market price or the
recovery rate to account for potential volatility in market prices.
Recoveries higher than Moody's expectations would have a positive
impact on the notes' ratings.
In addition to the quantitative factors that Moody's explicitly
modelled, qualitative factors are part of the rating committee's
considerations. These qualitative factors include the structural
protections in the transaction, its recent performance given the
market environment, the legal environment, specific documentation
features, the collateral manager's track record and the potential
for selection bias in the portfolio. All information available to
rating committees, including macroeconomic forecasts, input from
other Moody's analytical groups, market factors, and judgments
regarding the nature and severity of credit stress on the
transactions, can influence the final rating decision.
CVC CORDATUS: Fitch Assigns 'B+sf' Final Rating to Class F Notes
----------------------------------------------------------------
Fitch Ratings has assigned CVC Cordatus Opportunity Loan Fund-R DAC
notes final ratings, as detailed below.
Entity/Debt Rating
----------- ------
CVC Cordatus Opportunity
Loan Fund-R DAC
Class A XS2763024184 LT AAAsf New Rating
Class B-1 XS2763024341 LT AAsf New Rating
Class B-2 XS2763024697 LT AAsf New Rating
Class C XS2763024853 LT Asf New Rating
Class D XS2763025074 LT BBB-sf New Rating
Class E XS2763025231 LT BB-sf New Rating
Class F XS2763025405 LT B+sf New Rating
Sub Note XS2763025587 LT NRsf New Rating
TRANSACTION SUMMARY
CVC Cordatus Opportunity Loan Fund-R DAC is an arbitrage cash flow
collateralised loan obligation (CLO) that is being serviced by CVC
Cordatus Opportunity Loan Fund-R DAC. Net proceeds from the issue
of the notes are being used to purchase a static pool of primarily
secured senior loans and bonds, with a target par of
EUR500million.
KEY RATING DRIVERS
'B' Portfolio Credit Quality (Neutral): Fitch places the average
credit quality of obligors at 'B'/'B-'. The Fitch-weighted average
rating factor (WARF) of the identified portfolio is 25.0.
High Recovery Expectations (Positive): The portfolio comprises 100%
senior secured obligations and first-lien loans. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch-weighted
average recovery rate (WARR) of theidentified portfolio is 60.4%.
Diversified Portfolio Composition (Positive): The largest three
industries comprise 34.0% of the portfolio balance, the top 10
obligors at 11.1% of the portfolio balance and the largest obligor
at 1.2% of the portfolio.
Static Portfolio (Positive): The transaction does not have a
reinvestment period and discretionary sales are not permitted.
Fitch's analysis is based on the identified portfolio, which it
stressed by notching down by one notch all obligors with a Negative
Outlook (floored at 'CCC-'), which is 9.4% of the identified
portfolio. Post the adjustment on Negative Outlook, the WARF of the
portfolio is 26.3.
Deviation from Model-Implied Rating (MIR): The notes are lower than
their model-implied ratings (MIR) by one notch for class B, C, and
F, and two notches for class D and E, to reflect the insufficient
breakeven default-rate cushion on the Fitch-stressed portfolio at
their MIR, due to uncertain macro-economic conditions.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A 25% increase of the mean default rate (RDR) across all ratings
and a 25% decrease of the recovery rate (RRR) across all ratings of
the identified portfolio would lead to a downgrade of up to two
notches for the rated notes.
Downgrades, which are based on the identified portfolio, may occur
if the loss expectation is larger than initially assumed, due to
unexpectedly high levels of default and portfolio deterioration.
Due to the better WARF of the identified portfolio than the
Fitch-stressed portfolio and the deviation from their MIRs, the
class B and C notes display a rating cushion of one notch and the
class D, E and F notes of two notches.
Should the cushion between the identified portfolio and the
Fitch-stressed portfolio erode due to manager trading or negative
portfolio credit migration, a 25% increase of the mean RDR across
all ratings and a 25% decrease of the RRR all ratings of the
Fitch-stressed portfolio would lead to downgrades of up to three
notches for the rated notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings of the Fitch-stressed
portfolio would lead to an upgrade of up to four notches for the
rated notes, except for the 'AAAsf' notes.
Upgrades may occur on stable portfolio credit quality and
deleveraging, leading to higher credit enhancement and excess
spread available to cover losses in the remaining portfolio.
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
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
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.
FIDELITY GRAND 2022-1: S&P Assigns B-(sf) Rating on Cl. F-R Notes
-----------------------------------------------------------------
S&P Global Ratings assigned its credit ratings to Fidelity Grand
Harbour CLO 2022-1 DAC's class A-R Loan and class A-R, B-1-R,
B-2-R, C-R, D-R, E-R, and F-R notes. At closing, the issuer also
issued unrated subordinated notes.
This transaction is a reissue of the already existing transaction,
which originally closed in September 2022. The existing notes were
fully redeemed with the proceeds from the issuance of the
replacement notes on the reissue date.
Under the transaction documents, the rated notes will pay quarterly
interest unless there is a frequency switch event. Following this,
the notes will switch to semiannual payment.
This transaction has a 1.5 year non-call period and the portfolio's
reinvestment period will end approximately 4.5 years after
closing.
The ratings reflect S&P's assessment of:
-- The diversified collateral pool, which consists primarily of
broadly syndicated speculative-grade senior secured term loans and
bonds that are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization.
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading.
Portfolio benchmarks
CURRENT
S&P Global Ratings weighted-average rating factor 2,863.50
Default rate dispersion 567.96
Weighted-average life (years) 4.40
Weighted-average life (years) extended
to cover the length of the reinvestment period 4.56
Obligor diversity measure 114.51
Industry diversity measure 19.81
Regional diversity measure 1.27
Transaction key metrics
CURRENT
Total par amount (mil. EUR) 400.00
Defaulted assets (mil. EUR) 0
Number of performing obligors 135
Portfolio weighted-average rating
derived from S&P's CDO evaluator B
'CCC' category rated assets (%) 3.11
'AAA' actual portfolio weighted-average recovery (%) 37.10
Actual weighted-average spread (%) 4.26
Actual weighted-average coupon (%) 4.95
S&P said, "At closing, the portfolio is well-diversified, primarily
comprising broadly syndicated speculative-grade senior secured term
loans, and senior secured bonds. Therefore, we have conducted our
credit and cash flow analysis by applying our criteria for
corporate cash flow CDOs.
"In our cash flow analysis, we modelled the EUR400 million target
par amount, the covenanted weighted-average spread of 4.26%, the
covenanted weighted-average coupon of 4.95%, and the covenanted
weighted-average recovery rates. We applied various cash flow
stress scenarios, using four different default patterns, in
conjunction with different interest rate stress scenarios for each
liability rating category.
"Under our structured finance sovereign risk criteria, we consider
the transaction's exposure to country risk to be limited at the
assigned ratings, as the exposure to individual sovereigns does not
exceed the diversification thresholds outlined in our criteria.
"The transaction's documented counterparty replacement and remedy
mechanisms adequately mitigate its exposure to counterparty risk
under our counterparty criteria.
"The transaction's legal structure is bankruptcy remote, in line
with our legal criteria.
"Our credit and cash flow analysis indicate that the available
credit enhancement for the class B-1-R to F-R notes could withstand
stresses commensurate with higher rating levels than those we have
assigned. However, as the CLO is still in its reinvestment phase,
during which the transaction's credit risk profile could
deteriorate, we have capped our assigned ratings on these notes.
The class A-R Loan and class A-R notes can withstand stresses
commensurate with the assigned ratings.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe that our ratings are
commensurate with the available credit enhancement for the class
A-R Loan and class A-R, B-1-R, B-2-R, C-R, D-R, E-R, and F-R
notes.
"In addition to our standard analysis, we have also included the
sensitivity of the ratings on the class A-R Loan and class A-R to
F-R notes, based on four hypothetical scenarios.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F-R notes."
Ratings list
AMOUNT
CLASS RATING* (MIL. EUR) SUB (%) INTEREST RATE§
A-R AAA (sf) 173.00 38.00 Three/six-month EURIBOR
plus 1.50%
A-R Loan AAA (sf) 75.00 38.00 Three/six-month EURIBOR
plus 1.50%
B-1-R AA (sf) 31.65 27.00 Three/six-month EURIBOR
plus 2.15%
B-2-R AA (sf) 12.35 27.00 5.75%
C-R A (sf) 23.00 21.25 Three/six-month EURIBOR
plus 2.85%
D-R BBB- (sf) 26.00 14.75 Three/six-month EURIBOR
plus 4.00%
E-R BB- (sf) 19.00 10.00 Three/six-month EURIBOR
plus 6.84%
F-R B- (sf) 12.00 7.00 Three/six-month EURIBOR
plus 8.29%
Sub NR 29.15 N/A N/A
*The ratings assigned to the class A-R Loan and class A-R, B-1-R,
and B-2-R notes address timely interest and ultimate principal
payments. The ratings assigned to the class C-R, D-R, E-R, and F-R
notes address ultimate interest and principal payments. §The
payment frequency switches to semiannual and the index switches to
six-month EURIBOR when a frequency switch event occurs.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
N/A--Not applicable.
PENTA CLO 16: S&P Assigns B- (sf) Rating to Class F Notes
---------------------------------------------------------
S&P Global Ratings assigned its credit ratings to Penta CLO 16
DAC's class A1, A2, B, C, D, E, and F notes. At closing, the issuer
also issued unrated subordinated notes.
Under the transaction documents, the rated notes pay quarterly
interest unless there is a frequency switch event, upon which the
notes will pay semiannually.
This transaction has a 1.6-year non-call period and the portfolio's
reinvestment period will end approximately 4.6 years after
closing.
The ratings reflect S&P's assessment of:
-- The diversified collateral pool, which primarily comprises
broadly syndicated speculative-grade senior secured term loans that
are governed by collateral quality tests.
-- The credit enhancement provided through the subordination of
cash flows, excess spread, and overcollateralization (OC).
-- The collateral manager's experienced team, which can affect the
performance of the rated notes through collateral selection,
ongoing portfolio management, and trading. This is assessed under
our operational risk framework.
-- The transaction's legal structure, which is bankruptcy remote.
-- The transaction's counterparty risks, which is in line with
S&P's counterparty rating framework.
Portfolio benchmarks
CURRENT
S&P Global Ratings weighted-average rating factor 2,887.20
Default rate dispersion 536.10
Weighted-average life (years) 4.51
Obligor diversity measure 119.24
Industry diversity measure 21.47
Regional diversity measure 1.29
Weighted-average life (years) extended
to cover the length of the reinvestment period 4.56
Transaction key metrics (modeled assumptions)
CURRENT
Total par amount (mil. EUR) 400.00
Identified assets (%)* 99.21
Ramp-up at closing (%)* 97.71
Defaulted assets (mil. EUR) 0
Number of performing obligors 137
Portfolio weighted-average rating
derived from our CDO evaluator B
'CCC' category rated assets (%) 2.85
Actual 'AAA' weighted-average recovery (%) 35.54
Weighted-average spread covenanted(%)* 4.05
Weighted-average coupon covenanted(%)* 5.00
*As a percentage of target par.
§As a percentage of identified assets.
Rating rationale
S&P said, "Our ratings reflect our assessment of the collateral
portfolio's credit quality, which has a weighted-average rating of
'B'. The portfolio primarily comprises broadly syndicated
speculative-grade senior secured term loans and senior secured
bonds. Therefore, we conducted our credit and cash flow analysis by
applying our criteria for corporate cash flow CDOs.
"In our cash flow analysis, we modelled the EUR400 million par
amount, the covenanted weighted-average spread of 4.05%, the
covenanted weighted-average coupon of 5.00%, and the actual
weighted-average recovery rates. We applied various cash flow
stress scenarios, using four different default patterns, in
conjunction with different interest rate stress scenarios for each
liability rating category.
"The transaction's documented counterparty replacement and remedy
mechanisms adequately mitigate its exposure to counterparty risk
under our counterparty criteria.
"Following the application of our structured finance sovereign risk
criteria, the transaction's exposure to country risk is limited at
the assigned ratings, as the exposure to individual sovereigns does
not exceed the diversification thresholds outlined in our
criteria.
"The transaction's legal structure is bankruptcy remote, in line
with our legal criteria.
"Our credit and cash flow analysis indicate that the available
credit enhancement for the class B to E notes could withstand
stresses commensurate with higher ratings than those we have
assigned. However, as the CLO is still in its reinvestment phase,
during which the transaction's credit risk profile could
deteriorate, we have capped our ratings on these notes. The class
A1, A2, and F notes can withstand stresses commensurate with the
assigned ratings.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe that our ratings are
commensurate with the available credit enhancement for the class
A1, A2, B, C, D, E, and F notes.
"In addition to our standard analysis, to provide an indication of
how rising pressures among speculative-grade corporates could
affect our ratings on European CLO transactions, we have also
included the sensitivity of the ratings on the class A to E notes,
based on four hypothetical scenarios.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F notes."
Environmental, social, and governance
S&P said, "We regard the exposure to environmental, social, and
governance (ESG) credit factors in the transaction as being broadly
in line with our benchmark for the sector. Primarily due to the
diversity of the assets within CLOs, the exposure to environmental
credit factors is viewed as below average, social credit factors
are below average, and governance credit factors are average. For
this transaction, the documents prohibit assets from being related
to certain activities, including, but not limited to the following:
the production or trade of illegal drugs or narcotics; the
development, production, maintenance of weapons of mass
destruction, including biological and chemical weapons; the trade
in ozone depleting substances; manufacture or trade in pornography
or prostitution materials; payday lending; gambling; and more than
5% of revenues derived from tobacco distribution manufacture or
sale.
"Accordingly, since the exclusion of assets from these industries
does not result in material differences between the transaction and
our ESG benchmark for the sector, we have not made any specific
adjustments in our rating analysis to account for any ESG-related
risks or opportunities."
Ratings list
AMOUNT
CLASS RATING* (MIL. EUR) SUB (%) INTEREST RATE§
A1 AAA (sf) 236.00 41.00 Three/six-month EURIBOR
plus 1.49%
A2 AAA (sf) 14.80 37.30 Three/six-month EURIBOR
plus 1.75%
B AA (sf) 40.00 27.30 Three/six-month EURIBOR
plus 2.23%
C A (sf) 23.00 21.55 Three/six-month EURIBOR
plus 2.55%
D BBB- (sf) 28.00 14.55 Three/six-month EURIBOR
plus 3.95%
E BB- (sf) 18.60 9.90 Three/six-month EURIBOR
plus 6.79%
F B- (sf) 13.60 6.50 Three/six-month EURIBOR
plus 8.21%
Sub NR 29.40 N/A N/A
*The ratings assigned to the class A1, A2, and B notes address
timely interest and ultimate principal payments. The ratings
assigned to the class C, D, E, and F notes address ultimate
interest and principal payments.
§The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event occurs.
NR--Not rated.
N/A--Not applicable.
PERRIGO CO: S&P Downgrades ICR to 'BB-', Outlook Stable
-------------------------------------------------------
S&P Global Ratings lowered all of its ratings on the
over-the-counter (OTC) self-care Dublin-based Perrigo Co. PLC by
one notch, including the issuer credit rating to 'BB-' from 'BB',
the senior secured rating to 'BB' from 'BB+', and the senior
unsecured rating to 'B+' from 'BB-'. The senior secured and senior
unsecured recovery ratings remain '2' (70%-90%; rounded estimate:
75%) and '5' (10%-30%; rounded estimate: 25%), respectively.
All ratings have been removed from CreditWatch, where S&P placed
them with negative implications on Feb. 28, 2024.
The stable outlook reflects S&P's expectation for credit metrics to
meaningfully weaken over at least the next 12 months, resulting in
S&P Global Ratings-adjusted leverage between 5.5x-6.0x in 2024,
before improving to around 4.5x-5.0x by the end of 2025
Perrigo's hard-fought credit measure improvement will reverse in
2024 due to significant restructuring and remediation spending. S&P
said, "After some delay stemming from global widespread supply
chain disruptions and high inflation, Perrigo reached our credit
metric expectations at the end of 2023, including reducing S&P
Global Ratings-adjusted leverage to 4.8x, slightly below our prior
5x downgrade trigger. Perrigo will spend over $200 million
(including costs and capital expenditures; capex) in 2024 on infant
formula remediation, Energize restructuring, and SCRP--an increase
over $175 million compared to 2023. We expect total spending on
these initiatives from 2024-2026 to exceed $350 million. We will
not add back to S&P adjusted EBITDA any costs from these
initiatives that run through the income statement (roughly $140
million in 2024). This is consistent with our methodology which
typical includes in EBITDA items which affect cash flow from
operations (excluding interest and taxes). Most companies need to
restructure their operations to adapt to changing environments and
remain competitive."
S&P believes Perrigo's plan to restore infant formula profits in
the second half may be optimistic, resulting in $50 million EBITDA
drag in its 2024 forecast. In S&P's view, the infant formula
remediation plan--which focuses on ensuring a quality controlled
manufacturing environment--is a necessary action to strengthen
product safety and retailer confidence while meeting FDA regulatory
expectations. However, Perrigo might not get back on shelf as
quickly as it expects because of share losses from reduced product
availability over the near term.
S&P assumes the remainder of Perrigo's businesses grow EBITDA by
around $40 million in 2024; S&P Global Ratings-adjusted leverage is
likely to range between 5.5x and-6.0x and free operating cash flow
(FOCF) will be slightly negative.
S&P believes management is attempting to reposition the company by
driving margins higher through improving the cost structure and
expanding portfolio price points. The Energize restructuring plan
will focus on brand building (including Perrigo's blended-branded
approach, which will seek to expand portfolio price points
including selectively introducing mid-priced branded offerings) and
reductions in selling, general, and administrative expenses. This
includes consolidation of certain European functions, including
potentially the expansion of Perrigo Business Services, and
optimization of U.S. operations. The SCRP continues to focus on
cost of goods sold and distribution operations, including reducing
stock-keeping unit (SKU) proliferation, optimizing both sourcing
and manufacturing, and improving planning.
There are likely substantial expenses to be reduced in Europe,
which primarily sells branded products—however, the region
generates modest margins relative to other large, branded selfcare
companies. This is largely due to operating in more fragmented
European markets (particularly the Omega business, which has
relatively low market shares), which also tend to have effective
private label competition. However, it can be difficult to reduce
operations in Europe, particularly given strong unions.
S&P also believes Perrigo will need to closely manage its retailer
relationship in the U.S., where it will continue to try to reduce
SKUs and selectively introduce moderately priced branded products
without cannibalizing store brands.
S&P expects Perrigo's underlying EBITDA performance (excluding
restructuring) to be about flat in 2024 as infant formula weakness
offsets growth in other businesses. The company beat our 2023
forecast moderately due to better supply chain conditions, higher
pricing, SKU prioritization actions, and Hera SAS (HRA) cost
synergies.
S&P said, "However, the company has demonstrated relatively
aggressive financial policies since it acquired HRA in 2022, at
which time we estimate pro forma adjusted leverage was about 5.5x.
We expect our adjusted leverage metric will weaken to 5.5x-6.0x in
2024. While management expects to make more progress this year (it
anticipates 3.8x-4.0x at year-end) in reaching its 2025 goal of 3x
company-defined net leverage, we believe S&P adjusted leverage will
increase and remain above levels consistent with the prior rating
for over 12 and possibly the next 18 months. This is because the
company continues to direct cash flow to restructuring programs as
opposed to debt reduction.
"The stable outlook reflects our expectation for credit metrics to
meaningfully weaken over at least the next 12 months, primarily due
to elevated restructuring and remediation spending, and lower
profits in the infant nutrition business. This should result in S&P
adjusted leverage between 5.5x – 6.0x in 2024, before improving
to around 4.5x-5.0x by the end of 2025.
"We could lower our rating over the next 12 months if we believe
profitability will not rebound in 2025, resulting in forecasted S&P
Global Ratings-adjusted leverage sustained well above 5x. If
Perrigo does not restore profitability, we could also lower our
business risk assessment."
Potential downgrade triggers include:
-- An inability to successfully implement its supply chain
reinvention, infant formula remediation, and energize restructuring
program, which could prove more costly than expected or cause
unanticipated disruptions;
-- Escalating competition from branded rivals, including recently
formed, pure-play consumer health companies, or if the infant
formula business cannot recover customers and restore profit
levels;
-- Demands from retailers to significantly reduce pricing on
Perrigo's store brand products.
-- Unfavorable resolutions to industrywide litigation or any
remaining uncertain tax positions.
S&P could raise the ratings if it believes Perrigo will:
-- Implement its multiple restructuring and remediation programs
without significant disruption;
-- Grow the top line, potentially by gain traction on its
blended-branded portfolio approach; and
-- Sustain S&P Global Ratings-adjusted leverage comfortably below
5x.
S&P would also need to believe Perrigo's aggressive financial
policies, as demonstrated by its high leverage at the time of the
HRA acquisition and subsequent use of operating cash flow for
restructuring actions as opposed to greater debt reduction, will
moderate.
=========
I T A L Y
=========
NEOPHARMED GENTILI: Moody's Assigns 'B3' CFR, Outlook Stable
------------------------------------------------------------
Moody's Ratings has assigned a B3 corporate family rating and B3-PD
probability of default rating to Neopharmed Gentili S.p.A. At the
same time, Moody's has assigned B3 instrument ratings to
Neopharmed's proposed EUR750 million senior secured notes due 2030.
The outlook is stable.
The company is looking to refinance its existing debt and fund
transaction fees and expenses with the proposed instruments.
RATINGS RATIONALE
The B3 rating considers Neopharmed's leading position as a primary
care pharmaceutical company in Italy, a market characterized by
favorable fundamentals with a higher prevalence of off patent
branded products. This is in contrast to generics, which have
experienced slower penetration in recent years. Moody's rating
factors in the company's flexible cost structure with majority of
the sales force being independent contractors as well as the
strength of the company's sales representatives which is the second
largest scientific information network in Italy, according to the
company. Neopharmed's broad, well positioned product portfolio
across therapeutic categories, including high contribution from
chronic diseases products providing a degree of long term demand
sustainability, with limited concentration support its credit
quality. The rating is also supported by the company's good cash
flow generation capacity driven by high EBITDA margin of around
40%, which the company expects to boost to 45% by end 2025, and
asset light business model. The company has a good track record of
successfully integrating its acquisitions and extracting the
expected synergies which historically fueled its revenue and EBITDA
growth.
At the same time, the B3 rating reflects the company's high
geographic concentration in Italy, thereby making it susceptible to
potential fluctuations or adverse changes in Italy's regulatory
framework that could hinder the company's growth trajectory.
Furthermore, the company's high Moody's-adjusted total debt to
EBITDA estimated to be 7.3x as of December 31, 2023 (which includes
EUR17 million of non-operating expenses mainly related to severance
costs, per Moody's calculations) pro forma the contemplated
refinancing transaction, is expected to remain high at around 6.5x
by the end of 2024. Moody's anticipates a decrease in leverage
after 2024 which is contingent on the company's ability to maintain
a steady increase in earnings. The rating also takes into account
the company's 5% organic growth between 2019 and 2023, driven by
both legacy products and new product launches. This is above ca 1%
Italian retail pharma market growth for the past 5 years. Moody's
expects that organic growth will be complemented with potential
acquisitions, recognizing that Neopharmed is not constrained by the
structural earnings decline in existing off-patent branded product
portfolio, prompting it to make product acquisitions to maintain or
grow revenue. Given the track record of sizable acquisitions, the
rating also incorporates the risk of potential debt-funded
acquisitions which could delay the expected deleveraging. This
would hinge on a variety of factors including the valuation
multiples, sources of funding, ability to successfully integrate
and extract synergies.
Under its ESG framework, Moody's views Neopharmed's financial
policy and concentrated ownership as key governance risks and key
drivers of the rating action. In particular, the company has a high
opening Moody's-adjusted gross leverage of 7.3x pro forma the
refinancing.
LIQUIDITY
Neopharmed's liquidity is adequate, supported by expected cash
balances of EUR25 million post-closing of the transaction, and
access to a EUR130 million super senior revolving credit facility
(RCF) which is expected to be undrawn at closing. In the next 12 to
18 months, Moody's expects free cash flow of around EUR50 million
on average. Moody's does not expect the company to distribute any
dividends. The RCF includes a springing super senior net leverage
covenant set at 1.7x, tested only when the RCF is drawn above 40%.
Moody's estimates sufficient capacity in the covenant in case the
RCF is used.
RATING OUTLOOK
The stable outlook reflects Moody's expectation that Neopharmed's
operating performance will improve its Moody's-adjusted gross
leverage to below 6x by end of 2025, with increasing cash flow
generation from EUR1 million Moody's-adjusted FCF in 2023 to
EUR35-60 million p.a. in 2024-25. The outlook assumes that the
company will not undertake any major debt-funded acquisitions or
shareholder distributions and that it will maintain an at least
adequate liquidity profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure could develop if Neopharmed continues to
successfully execute its strategy to expand its current portfolio
and deliver on organic sales and EBITDA growth supporting
deleveraging. Quantitatively, that would translate into
Moody's-adjusted gross leverage trending towards 5.5x, a
Moody's-adjusted FCF to debt increasing above 5%, and its
Moody's-adjusted EBITA to interest expense improving above 2.0x, on
a sustainable basis. Furthermore, a stable regulatory environment
would also be a prerequisite for a positive rating action.
Downward rating pressure could develop if Neopharmed's operating
performance weakens with a material decline in EBITDA margins.
Numerically, this would translate into a Moody's-adjusted gross
leverage remaining above 6.5x, or its Moody's-adjusted FCF turning
negative, or its Moody's-adjusted EBITA to interest expense
declining towards 1x, for a prolonged period of time. In addition,
a deterioration of the company's liquidity profile or an adverse
change in the regulatory environment could create downward pressure
on its ratings.
STRUCTURAL CONSIDERATIONS
Neopharmed's senior secured notes are rated B3, in line with the
CFR. In the debt structure, the super senior RCF ranks ahead of the
notes and will get priority over the collateral. The security
package of the senior secured notes includes mainly share pledges
and pledges over certain intercompany receivables. In Moody's loss
given default analysis, the bonds rank in line with the trade
payables. This is because of the weak guarantor coverage and
security package.
The principal methodology used in these ratings was Pharmaceuticals
published in November 2021.
NEOPHARMED GENTILI: S&P Assigns Prelim 'B' ICR on Debt Refinancing
------------------------------------------------------------------
S&P Global Ratings assigned its preliminary 'B' long-term issuer
credit rating to Italy-based pharmaceutical company Neopharmed
Gentili SpA, the parent company of the group and the debt's issuer.
S&P assigned its preliminary 'B' issue rating to Neopharmed's
proposed EUR750 million senior secured bond, due in 2030. The
preliminary recovery rating is '4' (recovery range: 30%-50%;
rounded estimate: 40%).
S&P does not rate the super senior revolving credit facility
(RCF).
The outlook is stable because S&P expects Neopharmed's EBITDA
growth will continue thanks to solid organic top-line growth,
profitability improvements, and lower restructuring costs from
2024, which will help deleveraging, with its adjusted debt to
EBITDA at about 6.5x-7.0x in 2024 and 6.0x-6.5x in 2025 and the
EBITDA interest coverage ratio improving to 1.8x-2.0x in 2024 and
remaining above 2.0x thereafter.
S&P said, "The final ratings will depend on our receipt and
satisfactory review of all final transaction documentation.
Accordingly, the preliminary ratings should not be construed as
evidence of the final ratings. If the terms and conditions of the
final transaction depart from the material we have already
reviewed, or if the transaction does not close within what we
consider to be a reasonable timeframe, we reserve the right to
withdraw or revise our ratings.
"Neopharmed benefits from a large diversified portfolio of branded
off-patent products, with a leading market position in Italy. In
our view, Neopharmed has adequate diversification by therapeutic
area, with cardiovascular accounting for 40% of total sales in
2023, neurology representing (22%), allegro-respiratory (15%), and
musculoskeletal and others (23%). We positively note that the
company's portfolio of 124 products does not show any significant
concentration, and there is no significant dependency on any single
drug. Specifically, the top-selling product accounts for 8% of
sales and the top three products combined represent 23% of sales.
Most products are proprietary, accounting for 81% of total sales in
2023, with the remaining 19% being licensed. Overall, 94% of
products are prescribed. We view this a significant advantage for
the company, considering the historical preference in Italy for
branded products over generics and the high conversion of
prescriptions into customer purchases. Most of Neopharmed's
products have been on the market for over 25 years, with proven
long-term effectiveness. About 74% of Neopharmed's revenue is
generated by products having top three lending market position. We
also acknowledge that Neopharmed's portfolio is 100% off-patent,
which ensures no exclusivity expiration risk. Overall, we view
Neopharmed strategy as de-risked and consistent with the
enterprise's capabilities.
"We believe the large network of agents and representatives being a
key competitive advantage for Neopharmed. Neopharmed benefits of a
largest scientific information network, with over 400 pharma agents
and representatives, dedicated to the active promotion of brands to
general practitioners and specialists across Italy. In our view,
the experienced workforce provides good barriers to entry, somewhat
mitigating competition risk, and is key to identifying the right
prescribers. This is crucial to increase sales volumes, which is
the main topline driver according to our base-case scenario.
"Neopharmed does not have any significant supplier or customer
concentration. The company outsources the manufacturing of drugs to
over 60 contract manufacturing organizations (CMOs) as well as to
50 active pharmaceutical ingredient (API) suppliers, with the top
five suppliers contributing about 40% of 2023 total procurement.
Moreover, we note that Neopharmed reduces supply chain risk thanks
to dual-sourcing initiatives for top products and runs in-house
quality assessment and control of manufacturing and distribution.
We believe that Neopharmed has an efficient distribution network,
thanks to several wholesalers that distribute Neopharmed's products
to pharmacies, accounting for 97% of sales (exposure to hospitals
is only 3%).
"Our view of the business is constrained by Neopharmed's modest
scale of operations and high geographic concentration in Italy,
which exposes the company to competition and regulatory risks. With
revenue of about EUR266 million in 2023, Neopharmed has
significantly smaller scale than other players in the industry,
including rated peers such as Cheplapharm or Recordati. Moreover,
the company lacks geographical diversification, given it generates
almost 100% of its revenue in Italy, which significantly exposes
the company to competition and regulatory risks. Specifically,
Neopharmed faces competition from other pharmaceutical companies
active in primary care that have higher scale, larger financial
resources, and vertical integration that could allow them to
develop their product portfolios more quickly, leading to better
product diversification, and they would have higher resources to
expand their promotional network by engaging more representatives
and agents than Neopharmed. Moreover, the company does not engage
in research and development (R&D) and could therefore face
competition from new drugs launched by other players, potentially
challenging Neopharmed's market share. Moreover, while the Italian
regulatory framework has been rather stable over the past several
years, with stable healthcare spending at about 9% of total GDP on
average, unanticipated changes in laws and regulations could harm
the company's performance, which depends on the macroeconomic and
political conditions in Italy and related uncertainties and
volatility.
"We believe that Neopharmed has limited potential for international
expansion, considering that the current strategy its tailored for
the Italian market. Neopharmed's business model has proven
resilient even during challenging market conditions, such as the
COVID-19 pandemic, mostly thanks to its focus on the niche Italian
market that benefits from the historically demonstrated preference
for branded drugs versus generic options. The same preference is
not present in several European markets, where generic penetration
is higher and different customer preferences could challenge
Neopharmed's business model. We believe that Neopharmed can
generate solid organic top line growth without significant mergers
and acquisitions. While we do not factor any acquisitions into our
base-case, due to the uncertainty on timing and targets, we believe
that Neopharmed could make international investments and
acquisitions in the pharmaceutical industry, which could carry
integration as well as execution risks.
"We expect that Neopharmed will continue to show above-average
market growth, thanks to its focus on chronic diseases and strong
prescription rate among doctors. According to Euromonitor, the
retail pharma market in Italy is expected to grow at about 0%-1%
between 2023 and 2027. Nevertheless, we project that Neopharmed
will largely exceed this growth rate in our forecast, achieving
top-line growth of about 3.5%-4.5% in 2024 and 2025. This will be
mostly thanks to new launches and organic growth supported by its
business model. The model focuses on a wide network of pharma
representatives combined with its portfolio of branded established
medicines that have a long prescription history. We note as
positive that Neopharmed is mostly active in therapeutic areas,
such as cardiovascular, neurology, and allergo-respiratory, that
target chronic diseases, ensuring sustainability of long-term
demand. Although Neopharmed faces competition in the Italian market
from peers, we believe that overall competition from generic drugs
is somewhat limited, considering the limited price difference
between the two products and the population's strong preference for
branded products, which represent almost 80% of the pharmaceutical
market in Italy.
"Neopharmed's asset-light business model translates into high
EBITDA margins that we forecast at about 40%-42% in 2024-2025. We
project that Neopharmed's profitability will improve, with S&P
Global Ratings-adjusted EBITDA margin reaching 40%-42% in 2024 and
2025, from 38% in 2023, mostly thanks to better operating leverage,
lower restructuring costs, synergies from recent acquisitions, and
better price negotiations with suppliers. We think that the group
can sustain this level of margin because it outsources all
manufacturing activities; the business is very scalable with low
fixed costs; and it can leverage on its existing salesforce
following acquisitions. Moreover, Neopharmed does not engage in R&D
and applies an efficient distribution strategy. This business
models aids the flexibility of the group's cost structure. At the
same time, outsourcing of manufacturing activities reduces control
and could result in unexpected supply disruption, although this
risk is mitigated by dual sourcing. We understand that the company
manages this risk through an internal team dedicated to supply
chain and quality organization, its wide network contract
manufacturing partners, and an efficient approach to stock
management.
"We forecast Neopharmed will generate solid FOCF of EUR35
million-EUR40 million in 2024, improving to above EUR50 million
from 2025, thanks to its capital expenditure (capex)-light business
model and limited working capital requirements. We project that
Neopharmed's FOCF will significantly improve in 2024 from 2023,
when the company's FOCF generation was impaired by restructuring
costs of about EUR17 million, one-off working capital outflow of
about EUR15 million related to the Valeas acquisition, and high
cash interest expenses of about EUR71 million. From 2024, we expect
that reduced restructuring costs of about EUR3 million-EUR5
million, limited capex spending of about EUR1 million-EUR2 million,
normalized working capital, and lower cost of debt of about EUR50
million–EUR60 million following the refinancing will support cash
flow generation, with FOCF standing at about EUR35 million-EUR40
million. We expect that FOCF will further improve in 2025, to about
EUR50 million-EUR55 million, mostly due to higher absolute EBITDA.
Moreover, we project that adjusted EBITDA interest coverage will
improve to 1.8x-2.0x in 2024 and above 2.0x in 2025, from 1.4x in
2023. We believe that if adjusted EBITDA interest coverage falls
below 2.0x, the cost of debt would become difficult to sustain. As
such, the rating headroom is currently limited.
"We anticipate Neopharmed's capital structure will be highly
leveraged after refinancing, with adjusted debt to EBITDA at about
6.5x-7.0x in 2024 before deleveraging to 6.0x-6.5x in 2025.
Following the refinancing, we expect that S&P Global
Ratings-adjusted debt will include the senior secured notes of
about EUR750 million in 2024, which will be used to refinance the
existing EUR700 million unitranche and pay for transaction fees and
expenses. We expected that the EUR130 million RCF will be fully
undrawn at the transaction's close and during our forecast period.
We note that the company does not have any significant pension or
leasing liabilities and does not make use of factoring. We expect
that leverage will decline to 6.5x-7.0x in 2024 from 7.2x in 2023,
with higher absolute EBITDA more than compensating higher financial
debt. We project that continued profitability improvements and
solid top-line growth will drive leverage down in 2025, with S&P
Global Ratings-adjusted debt standing at 6.0x-6.5x. Given the
private equity ownership by NB Renaissance and Ardian, we believe
that Neopharmed's appetite for deleveraging is low, and we assume
that self-generated cash flow will fund external development
opportunities; rather than debt reduction. Therefore, we do not
deduct cash balances from our calculation of adjusted debt.
"The stable outlook reflects our expectation that Neopharmed will
continue to generate solid organic growth, also supported by the
stable regulatory environment and by the favorable market dynamics
in Italy, achieving an S&P Global Ratings-adjusted EBITDA margin in
the 40%-42% range and FOCF to debt of 4%-5% in the next 12 months.
We expect the adjusted debt-to-EBITDA ratio will stand at about
6.5x-7.0x in 2024, improving to 6.0x-6.5x in 2025, and that the
EBITDA interest coverage ratio will improve above 2.0x over the
next 12-18 months."
Downside scenario
S&P said, "We could lower the rating if Neopharmed's operating
performance deviates materially from our base case, for instance
due to higher competition or unfavorable changes in the Italian
regulatory framework, so that adjusted EBITDA interest coverage
fails to improve to 2.0x for a protracted period. We could also
lower the rating if FOCF turned negative due to
higher-than-expected cash interest payments, or due to higher
restructuring costs or working capital outflows following
acquisitions, or if the financial sponsor engaged in higher
shareholder remuneration."
Upside scenario
S&P said, "We could raise the rating if we were convinced that the
financial sponsor would consistently support the group's
deleveraging trajectory such that adjusted debt to EBITDA could
remain comfortably below 5x, supported by sustained FOCF generation
and commitment to maintain leverage in line with a higher rating.
We also could consider a positive rating action if the company
markedly increased the scale and diversity of its product
offerings, but we do not expect this in the near term.
"Governance factors are a moderately negative consideration in our
credit rating analysis of Neopharmed, because of controlling
ownership. We view financial sponsor-owned companies with
aggressive or highly leveraged financial risk profiles as
demonstrating corporate decision-making that prioritizes the
interests of the controlling owners. This also reflects the
generally finite holding periods and a focus on maximizing
shareholder returns."
===================
K A Z A K H S T A N
===================
AB KAZAKHSTAN: Fitch Hikes LongTerm IDR to 'B', Outlook Positive
----------------------------------------------------------------
Fitch Ratings has upgraded AB Kazakhstan - Ziraat International
Bank JSC's (KZI) Long-Term (LT) Foreign- and Local-Currency Issuer
Default Ratings (IDRs) to 'B' from 'B-'. Fitch has also upgraded
the bank's National Long-Term Rating to 'BB+(kaz)' from 'BB-(kaz)'.
The Outlooks are Positive.
The upgrade follows a recent similar rating action of parent
Turkiye Cumhuriyeti Ziraat Bankasi Anonim Sirketi's (Ziraat).
KEY RATING DRIVERS
KZI's 'B' LT IDRs reflect potential support from Ziraat. The
Positive Outlook on KZI mirrors that on the parent bank's.
In Fitch's view, Ziraat has a high propensity to support KZI.
Beyond high operational integration, this is due to its majority
ownership and high reputational risk for the parent from KZI's
default, given common branding and Ziraat's broader international
presence. In addition, the cost of potential support is low
considering the subsidiary's small size relative to the parent's
(end-2023: 0.4% of the group's consolidated assets), and a recent
record of considerable equity support (2022: 21% of risk-weighted
assets).
KZI's 'BB+(kaz)' National Rating reflects Fitch's view of the
bank's creditworthiness relative to domestic peers'.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The Outlooks on KZI's LT IDRs would be changed to Stable if the
Outlook on Ziraat's LT Foreign-Currency IDR is revised to Stable.
KZI's ratings could be downgraded if Ziraat's propensity to support
its subsidiary weakens considerably.
The National Rating is sensitive to a downgrade of KZI's LT
Local-Currency IDR and to a negative reassessment by Fitch of KZI's
creditworthiness relative to local peers'.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Positive rating action on the parent's LT Foreign-Currency IDR
would result in a corresponding rating action on the subsidiary.
The National Rating is sensitive to an upgrade of KZI's LT
Local-Currency IDR and to a positive reassessment by Fitch of KZI's
creditworthiness relative to local peers'.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
KZI's ratings are linked to Ziraat's IDRs.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of
ESG credit relevance is a score of '3'. This means ESG issues are
credit neutral or have only a minimal credit impact on the entity,
either due to their nature or the way in which they are being
managed by the entity. Fitch's ESG Relevance Scores are not inputs
in the rating process; they are an observation of the materiality
and relevance of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
AB Kazakhstan
- Ziraat
International
Bank JSC LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B Upgrade B-
Natl LT BB+(kaz)Upgrade BB-(kaz)
Shareholder Support b Upgrade b-
===================
L U X E M B O U R G
===================
BL CONSUMER II: S&P Assigns B- (sf) Rating to Class F-Dfrd Notes
----------------------------------------------------------------
S&P Global Ratings assigned credit ratings to BL Consumer Issuance
Platform II S.a.r.l., Compartment BL Consumer Credit 2024's (BL
Cards 2024) class A and B notes, and to the interest deferrable
class C-Dfrd, D-Dfrd, E-Dfrd, F-Dfrd, G-Dfrd, X1-Dfrd, and X2-Dfrd
notes.
S&P said, "Our ratings address the timely payment of interest and
the ultimate payment of principal on the class A and B notes. Our
ratings on the class C-Dfrd to G-Dfrd, and X1-Dfrd and X2-Dfrd
notes address the ultimate payment of interest and principal on
these notes, until they become the most senior notes outstanding."
Unpaid interest does not accrue additional interest and will be due
on the notes' legal final maturity.
BL Cards 2024 is a securitization of revolving credit receivables
and fixed-rate amortizing installment loans originated by Buy Way
Personal Finance S.A./N.V. (Buy Way) to borrowers based in Belgium
(85% of total borrowers) and Luxembourg (15% of total borrowers).
BL Consumer Issuance Platform II S.a.r.l., a "SIC institutionnelle
de droit belge", purchased the receivables through its Compartment
BL Consumer Credit 2024. The issuer is a "societe de titrisation,"
which is bankruptcy remote under Luxembourg securitization law.
BL Consumer Credit 2024's structure is similar to its predecessor,
BL Consumer Credit 2021.
The structure includes a split interest and principal waterfall and
has a 36-month revolving period. Interest on the notes is payable
at one-month EURIBOR plus a margin. The cap applies until the class
A notes redeem; it has a strike rate of 4%. The notional is based
on the portfolio's performing balance assuming 0% prepayments until
the class A notes redeem. The issuer paid an upfront cap premium
outside the priority of payments at closing, funded by the issuance
proceeds. In addition, it will pay a monthly running cap cost
during the amortization period based on the product of the cap
notional amount and a rate of 45 basis points.
S&P's ratings reflect its assessment of the transaction's payment
structure and its cash flow analysis, which assess whether the
notes would be repaid under ratings-specific scenarios. The
transaction's structure relies on a combination of subordination, a
dedicated cash reserve for the class A, B, and C-Dfrd notes, and an
excess spread trapping reserve, which can also be trapped to fund a
"spread reserve" and which provides credit enhancement to the class
D-Dfrd, E-Dfrd, and F-Dfrd notes.
The class X1-Dfrd and X2-Dfrd notes are not collateralized by loan
receivables and are repaid through available excess spread. These
notes' proceeds were used to fund the reserve fund at closing.
S&P said, "The Class D-Dfrd notes could pass at 'BBB+' in our cash
flow analysis. However, we have considered the notes' relative
level of credit enhancement and position in the capital structure
along with the outcome of the sensitivity runs when assigning our
'BBB (sf)' rating.
"The class X1-Dfrd, X2-Dfrd, and G-Dfrd notes fail to pass any
stress tests in our cash flow analysis, and we consider their
payment to be dependent upon favorable business, financial, or
economic conditions and is commensurate with a 'CCC (sf)' rating.
"Our ratings are not constrained by counterparty risk, sovereign
risk, operational risk, or the application of our legal criteria."
Ratings
CLASS RATING* AMOUNT (MIL. EUR)
A AAA (sf) 260.700
B AA- (sf) 26.400
C-Dfrd A- (sf) 13.200
D-Dfrd BBB (sf) 9.900
E-Dfrd BB (sf) 6.600
F-Dfrd B- (sf) 6.600
X1-Dfrd CCC (sf) 9.009
X2-Dfrd CCC (sf) 9.009
G-Dfrd CCC (sf) 6.600
*S&P's ratings address timely payment of interest and ultimate
principal on the class A and B notes and the ultimate payment of
interest and principal on the other rated notes. Its ratings also
address timely payment of interest due when the deferrable notes
become the most senior outstanding class. Any deferred and unpaid
interest is due by the legal final maturity.
Dfrd--Deferrable.
MILLICOM INT'L: Moody's Rates New Sr. Unsecured Global Notes 'Ba3'
------------------------------------------------------------------
Moody's Ratings has assigned a Ba3 rating to proposed Senior
Unsecured Global Notes due in 2032 to be issued by Millicom
International Cellular S.A. (Millicom). Millicom's existing Ba3
Senior Unsecured Global Notes rating and its Ba2 Corporate Family
Rating remain unchanged. The ratings outlook is stable.
The issuance is part of Millicom's liability management and will
extend the company's debt maturity profile. The new issuance is not
expected to affect the company's leverage metrics since the
proceeds will be used to fully repay $200 million of indebtedness
outstanding under the DNB Loans due 2026. Any remaining net
proceeds will be used to repay existing indebtedness of Millicom
and its subsidiaries and for other general corporate purposes.
The rating of the proposed notes assumes that the issuance will be
successfully completed as planned and that the final transaction
documents will not be materially different from draft legal
documentation reviewed by Moody's to date and assume that these
agreements are legally valid, binding and enforceable.
RATINGS RATIONALE
Millicom's Ba2 corporate family rating reflects the group's
historically stable operating performance, leading market shares in
key regions, and diversified profit and cash flow generation. The
Ba2 rating also incorporates the operating risks arising from
political and macroeconomic pressures in countries where Millicom
operates, as well as ongoing competitive pressures in key markets,
which could potentially impede the improvement of the group's
credit metrics.
The Ba3 rating of Millicom's senior unsecured notes reflects their
structural subordination to debt at the operating company level as
well as their unguaranteed status. Debt at the holding company
level amounts to around 34.1% of total consolidated debt as of
December 30, 2023.
The proceeds raised with the proposed notes will be used to repay
$200 million of indebtedness outstanding and accrued interest under
the DNB Loans, which consist of (i) a 100 million unsecured credit
agreement of Millicom due 2026, with DNB Sweden AB as
administrative agent and initial lender, and (ii) a $136 million
unsecured credit agreement of Telemovil El Salvador, S.A. due
2026, a subsidiary of Millicom, as borrower, and Millicom, as
guarantor, with DNB Sweden AB as administrative agent and initial
lender. Any remaining proceeds will be used for repayment of
existing indebtedness of Millicom and its subsidiaries and for
other general corporate purposes. The debt will be repaid in
conjunction with the issuance of the new notes resulting in no
temporary increase in leverage.
The stable outlook reflects Moody´s expectation that Millicom will
maintain adequate liquidity while remaining committed to its
medium-term 2.5x net leverage target. Moody´s also expect the
company to continue its conservative approach of managing debt
maturities ahead of schedule to avoid near-term concentration of
payments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade the ratings if the group's leverage improves
to below 2.5x total adjusted debt/EBITDA, Moody's adjusted retained
cash flow to gross debt improves to above 30% on a sustained basis.
In addition, the group is expected to demonstrate strong liquidity
on a sustained basis as well as maintenance of its strong market
position, good geographic diversification of cash flows, continued
ability to repatriate dividends from its subsidiaries and
conservative financial policies.
The ratings could be downgraded if Moody's adjusted debt/EBITDA is
expected to remain above 3.5x over the rating horizon. Ratings
could also be downgraded if the group's liquidity position
deteriorates, or if the company fails to demonstrate ability to
secure financing to meet upcoming maturities. Additionally, an
increase in governance risk or persistently high execution risks in
Colombia could negatively impact the ratings.
The principal methodology used in this rating was
Telecommunications Service Providers published in November 2023.
Millicom International Cellular S.A. (Millicom) is a global
telecommunications investor focused on Latin America, with cellular
operations and licenses in nine countries in the region. The
company has around 45 million mobile customers and serves over 4.1
million cable and broadband households. The group's two largest
markets are Guatemala and Colombia, which together contributed to
about 50% of total revenue as of December 2023. Millicom's reported
consolidated revenue and EBITDA for the last twelve months ended
December 2023 reached $5.7 billion and $2.1 billion, respectively.
The company is incorporated in Luxembourg and publicly listed on
the Nasdaq Stock Market in New York and Nasdaq Stockholm.
WINTERFELL FINANCING: Fitch Affirms 'B' IDR, Outlook Now Stable
---------------------------------------------------------------
Fitch Ratings has revised building materials distributor Winterfell
Financing S.a.r.l.'s (Stark) Outlook to Stable from Positive and
affirmed its Long-Term Issuer Default Rating (IDR) at 'B'. Fitch
has also affirmed the group's EUR1,795 million senior secured term
loan B (TLB) at 'B+' with a Recovery Rating at 'RR3'.
The Outlook revision mainly reflects expected subdued near-term
profitability due to a challenging market, negative-to-neutral free
cash flow (FCF) for FY24 (financial year ending July) and FY25, and
resulting high leverage. Its profitability has been hit by steep
volume declines and deflationary pressures across its core
geographic markets. Fitch expects gradual deleveraging in
FY25-FY27, driven by the combination of demand recovery, continued
progress in cost-saving initiatives and ongoing turnaround of its
UK business.
Rating strengths are a solid business profile, underpinned by the
group's leadership in the heavy building materials distribution
market in the Nordics and Germany, and healthy diversification with
limited geographic, product, customer and supplier concentration.
Its exposure to cyclical construction end-markets is mitigated by
its focus on fairly resilient renovation, maintenance and
improvement (RMI) construction end-markets. The rating is mainly
constrained by its expected high leverage and weaker- than-expected
performance would lead to a negative rating action.
KEY RATING DRIVERS
Temporary Profitability Pressures: Fitch expects temporary
profitability pressures from volume declines and deflationary
pressures, especially in new-build residential end-markets. Fitch
forecasts about a 30% fall in nominal Fitch-defined EBITDA in FY24
on a sharp single-digit like-for-like revenue decline (excluding
M&A) and weaker operating profitability. Profitability pressures
have been exacerbated by the group's high exposure to
energy-intensive heavy building materials such as timber, which had
been exposed to sharp price increases. Fitch expects gradual
recovery in nominal EBITDA in FY25-FY26 on higher activity across
the construction market and gradual margin increase.
Gradual EBITDA Margin Recovery: Fitch expects a gradual recovery of
the group's Fitch-defined EBITDA margin to about 5% by FY27 from
2.6% in FY24. The margin increase will be supported by gradual
demand recovery, continued progress in cost-saving initiatives and
ongoing turnaround of the UK distribution business (SGBDUK), which
was acquired from Compagnie de Saint-Gobain in March 2023.
Manageable Execution Risk: Fitch deems execution risk as
manageable, given ongoing progress in the integration of SGBDUK and
Stark's successful integration of its German branch since October
2019, when it took over SGBD Germany, which became Stark
Deutschland. Management has introduced a new executive team into
the UK branch and outlined a turnaround plan, mainly on sourcing
and a revised business focus on SME customers, in a bid to raise
branch profitability to the group level.
Rating Limited by Leverage: The rating remains constrained by high
gross leverage and only modest expected deleveraging. Fitch
estimates temporarily high EBITDA gross leverage at above its 7.5x
negative sensitivity in FY24 due to temporary profitability fall.
Fitch expects gradual deleveraging towards 7x in FY25 and 5x in
FY26, mainly on improving operating profitability.
Neutral-to-Positive FCF: Fitch expects Stark to generate neutral to
positive FCF in FY25-FY27, following temporary cash consumption in
FY24 driven by weaker demand and high non-recurring outflows mainly
related to the integration of SGDBUK. The group's cash flow
volatility is limited by its high share of variable and
semi-variable costs as well as a portfolio of around EUR1.1 billion
of owned real estate assets. The unencumbered real estate portfolio
provides additional financial flexibility.
Solid Business Profile: Stark's business profile is mainly
underpinned by its leading position in the heavy building materials
distribution market in the Nordics and Germany. The completed
SGBDUK purchase has improved Stark's geographic diversification by
acquiring the second-largest building merchant's platform in the
UK. The group's sound diversification is also supported by its
extensive branch coverage with proximity to the largest growing
urban areas as well as limited supplier and customer
concentration.
The business profile is mainly limited by its exposure to the
cyclical construction end-markets and intense competition in the
fragmented distribution market. This is mitigated by its focus on
the more resilient RMI end-markets (around 70% of gross profit).
Focus on Integration: Since 2019 Stark's revenue has grown steadily
to over EUR7 billion in FY23 - and Fitch forecasts at over EUR8
billion for FY24 - from EUR2.3 billion, through two transformative
acquisitions (Stark Deutschland and SGDBUK), a number of bolt-ons,
as well as organic growth. Fitch expects Stark to prioritise the
integration of recently acquired entities and realisation of
planned synergies. Successful integration, and the delivery of
cost-control measures and operational efficiencies remain key
rating drivers.
DERIVATION SUMMARY
Fitch views Stark's business profile as broadly in line with
Quimper AB's (Ahlsell; B+/Stable), a leading Nordic distributor of
installation products, tools and supplies to professional
customers. Both companies benefit from strong market positions,
significant scale of operations and sound diversification with
fairly broad product offerings, large exposure to renovation
end-markets and limited customer and supplier concentration.
Stark's broader geographic footprint is partly offset by Ahlsell's
stronger end-market diversification given its exposure to
infrastructure and industry end-markets.
Both companies' ratings are constrained by leverage which has,
however, improved since their respective refinancings in 2021.
Ahlsell's financial profile is stronger than that of Stark based on
lower expected leverage and stronger profitability supported by
higher EBITDA margins and FCF generation.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
- Revenue of EUR8.2 billion in FY24, and to grow in mid-single
digits p.a. in FY25-FY27
- EBITDA margin of 2.6% in FY24 and gradually increasing to 5.0% in
FY27 driven by demand recovery, SGBDUK integration and cost
control
- Average annual M&A of EUR20 million in FY25-FY27
- Capex at 1.3% of revenue annually in FY24-FY27
- No dividends
RECOVERY ANALYSIS
Key Recovery Rating Assumptions:
- The recovery analysis assumes that Stark would be reorganised as
a going-concern (GC) in bankruptcy rather than liquidated. It
reflects Stark's market position, dense network of branches, own
portfolio of brands and potential for further consolidation in the
fragmented distribution market
- Fitch has assumed a 10% administrative claim
- Fitch estimates a GC EBITDA of EUR280 million for Stark, which
reflects Fitch's view of a sustainable, post-reorganisation EBITDA
level upon which Fitch bases the enterprise valuation (EV). It
reflects intense market competition and a failure to broadly pass
on raw-material cost inflation together with an inability to
successfully extract acquisition synergies
- An EV multiple of 5.5x is applied to the GC EBITDA to calculate a
post-reorganisation EV. The multiple reflects Stark's leading
position across the Nordics and German heavy materials distribution
market, significant scale and strong asset quality with a large
owned real estate portfolio located near growing urban areas. The
multiple is in line with that of Nordic building material
distributor Ahlsell
- Its waterfall analysis generates a ranked recovery for the EUR1.8
billion TLB in the 'RR3' category, leading to 'B+' rating. The
waterfall-generated recovery computation is 54%.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- EBITDA leverage below 5.5x on a sustained basis
- EBITDA margin above 5.5%, as underscored by successful
integration of acquisitions
- Consistently low-to-mid single-digit FCF margins
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- EBITDA leverage above 7.5x on a sustained basis
- Problems with integration of acquisitions or increased debt
funding
- EBITDA margin below 4.0% on a sustained basis
- Erosion of FCF to neutral or negative
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: At FYE23, Stark had about EUR239 million of
readily available cash (excluding EUR70 million Fitch's adjustment
for intra-year working-capital swings) and had access to a fully
undrawn committed RCF of about EUR371 million maturing in November
2027. It has no significant short-term debt maturities (apart from
its non-recourse factoring). Fitch estimates about EUR100 million
negative FCF in FY24 and broadly neutral FCF in FY25. The group's
financial flexibility is supported by its about EUR1.1 billion
unencumbered real estate portfolio.
Concentrated Debt Structure: Stark's total debt of about EUR2.0
billion at FYE23 was concentrated on its EUR1,795 million TLB
maturing in May 2028. Other debt mainly comprised mortgage loans
and non-recourse factoring.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
Winterfell
Financing S.a.r.l. LT IDR B Affirmed B
senior secured LT B+ Affirmed RR3 B+
=====================
N E T H E R L A N D S
=====================
BME GROUP: Moody's Affirms 'B2' CFR & Alters Outlook to Negative
----------------------------------------------------------------
Moody's Ratings has affirmed BME Group Holding B.V.'s corporate
family rating at B2 and the probability of default rating at B2-PD.
Concurrently, Moody's has affirmed the B2 ratings on EUR1,350
million backed senior secured first lien term loan B2 due 2029
(which will subsequently increase to EUR1,500 million as a result
of the proposed EUR150 million fungible add on), the EUR195.2
million backed senior secured first lien revolving credit facility
(RCF) due 2029 and the EUR336 million backed senior secured term
loan B (TLB). The outlook has changed to negative from stable.
The rating action follows BME's announcement that it intends to
refinance a portion of the currently outstanding EUR336 million
backed TLB due 2026 using the proposed fungible add on. The
transaction is leverage neutral and will improve BME's maturity
profile. The rating action reflects Moody's expectations that the
transaction will be completed as planned.
RATINGS RATIONALE
The rating action reflects:
-- BME's weaker than expected credit metrics in 2023 due to a
sharp deterioration in construction activities in the second half
of last year, and heightened risk that the company will not be able
to improve credit metrics to levels required for the B2 rating over
the next 12-18 months, due to the challenging conditions in the
construction markets.
-- The rating agency estimates Moody's adjusted leverage of around
7.6x in 2023, and interest coverage EBITA/interest of around 1.0x,
which weakly position the company in the current rating. No sign of
meaningful earnings' recovery in the second half of 2024, after a
likely weak start of the year, would increase negative pressure on
the rating.
-- Moody's expectations that FCF, after lease and interest
payment, will breakeven in 2024 and 2025, and improving thereafter.
These forecasts are contingent on the company's ability to further
release working capital over the next two years, particularly given
Moody's projected increase in interest payments.
-- Good liquidity, also supported by around EUR750 million of
unencumbered real estate assets, sizable cash balance and improved
maturity profile following the proposed transaction.
-- Management's solid track record of executing its strategy,
including delivering cost savings initiatives, and integrating
acquired businesses.
The rating continues to be constrained by BME' low profitability,
typical of this business model, and its acquisitive strategy that
can increase leverage over time. At the same time, Moody's expects
that given the limited FCF generation over the next 12-18 months,
BME will decelerate its pace of acquisitions, focusing on
deleveraging. The rating remains supported by the high share of
renovation activities (70% of gross profit), good geographic
diversification in Europe including exposure to southern Europe
(Spain and Portugal) where demand has been more resilient, rising
demand for energy-efficient renovation and housing shortage, which
will support earnings recovery.
LIQUIDITY
BME's liquidity is good and will benefit from the extension of part
of its maturity profile. The cash balance of around EUR403 million
as of December 2023 and an undrawn RCF of EUR195 million support
liquidity. Sources of liquidity are further supported by a EUR750
million portfolio of real estate assets.
These sources, together with internally generated funds from
operations, are sufficient to cover intra-year working capital
swings. Liquidity is further supported by Moody's expectation that
working capital will be released over the next 12 months due to the
lower volumes. Other uses include annual capital spending of around
1% of sales, lease payments and spending on bolt-on M&A.
The RCF contains a springing maintenance covenant of 8.4x leverage
calculated on a first-lien senior secured net debt basis, which is
tested when the facility drawings net of cash exceed 45% of total
commitments.
STRUCTURAL CONSIDERATIONS
BME's senior secured first-lien term facilities comprising the
senior secured term loans B and the RCF share the same security and
are guaranteed by certain subsidiaries of the group, accounting for
at least 80% of consolidated EBITDA. As a result, the loans and the
RCF are rated B2, in line with the CFR.
OUTLOOK
The negative outlook reflects BME's weak credit metrics for the
current rating and uncertainty over the timing and strength of
earnings' recovery. No sign of meaningful earnings' recovery in the
second half of 2024, after a likely weak start of the year, would
increase negative pressure on the rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if strong earnings growth results in
sustained improvement in credit metrics, including:
-- Moody's-adjusted debt/EBITDA below 5.0x,
-- Moody's-adjusted FCF/debt in the high-single-digit percentages
and good liquidity,
-- Operating margins increasing towards 5.0%
-- Evidence of a balanced financial policy
The ratings could be downgraded with expectations for:
-- Moody's-adjusted debt/EBITDA above 6.25x on a sustained basis,
or
-- Moody's-adjusted EBITA/Interest sustainably below 1.5x, or
-- FCF reducing below 2% on a sustained basis, or
-- If liquidity deteriorates
The principal methodology used in these ratings was Distribution
and Supply Chain Services published in February 2023.
COMPANY PROFILE
Based in Schiphol, the Netherlands, BME Group Holding B.V. (BME) is
the third-largest European building material distributor operating
in Germany, the Netherlands, Belgium, France, Switzerland, Austria,
Portugal and Spain. On October 31, 2019, the company was acquired
by Blackstone from CRH plc (Baa1, stable) for EUR1.7 billion. In
2023, BME generated EUR5.4 billion of revenue and EUR220 million of
management-adjusted EBITDA (pre-IFRS16).
BME GROUP: S&P Alters Outlook to Negative, Affirms 'B' ICR
----------------------------------------------------------
S&P Global Ratings revised its outlook on building material
distributor BME Group Holding B.V. (BME) to negative from stable
and affirmed its 'B' long-term issuer credit and issue ratings on
BME and its debt, including the proposed fungible add-on.
The negative outlook reflects that S&P could lower the issuer
credit rating on BME by one notch if it does not see a deleveraging
toward 6.5x starting from next year.
S&P said, "BME delivered weaker results than anticipated in 2023,
and we see the environment remaining challenging in the first half
of 2024. BME's S&P Global Ratings-EBITDA declined by about 25% to
EUR303 million in 2023, driven by weaker than initially foreseen
demand, pricing, and margins given the high cost inflation. This
was despite the execution of a cost-reduction program realizing
EUR58 million of cost reductions. Markets in the Netherlands,
Belgium, Germany, and Austria were more severely affected than
those in southwestern Europe. We think the operating environment
will remain challenging, especially in the first half of 2024,
leading to further volume decline, as well as margins remaining low
due to high cost inflation. This should translate into S&P Global
Ratings-adjusted debt to EBITDA remaining elevated at 8.2x-8.5x in
2024, compared with 8.2x in 2023. Our EBITDA figure also captures
one-off and restructuring costs of about EUR44 million in 2023 and
EUR40 million in 2024, notably reflecting the execution of the
cost-reduction program and of organizational efficiency measures.
We do not net the cash as part of our leverage calculation because
of the private equity sponsor ownership. We note that BME has a
track record of tolerating higher leverage than rated peers due to
transactions completed in the past, such as debt-funded
acquisitions and dividend distributions, which increase leverage.
"Progressive deleveraging starting from next year supports the
ratings. We believe rated European building materials distributors,
including BME, will continue benefiting from supportive secular
trends related to energy efficiency over the medium to long term.
Due to its significant exposure to the repair, maintenance, and
improvement (RMI) market (70% of gross profit) and markets with
ageing housing stocks, BME should benefit from the European Green
Deal program. We therefore forecast a recovery in volumes starting
from 2025 and an improvement in margins as the company improves its
organizational efficiency. BME's S&P Global Ratings-adjusted debt
to EBITDA should therefore decline to 6.9x-7.1x in 2025 and
6.1x-6.3x in 2026.
"We anticipate that free operating cash flow (FOCF) after lease
payments will be modestly positive or break even in 2024, before
recovering in 2025. Despite lower earnings and higher cash interest
expense, BME's FOCF after lease payments remained positive at EUR60
million-EUR70 million, driven by efficient management of
inventories resulting net working capital release of EUR130 million
in 2023. We note that BME remains focused on cost discipline and
further optimization of working capital, which supports our
expectations that FOCF before lease payments will likely remain
above EUR100 million in 2024-2025. The limited capital intensity of
distributors (capital expenditure [capex] representing 1.2% of
sales for BME) further supports the positive cash flow generation.
That said, we note that FOCF after lease payments will be modestly
positive or break even in 2024, depending on the trading
environment. Our base case assumes approximately EUR130 million of
lease payments every year.
"The proposed partial refinancing and the healthy cash position
further reduce refinancing risks. In order to optimize its capital
structure, BME is looking to issue a fungible add-on to its TLB2
tranche in order to partially repay the existing TLB1 stub. We
believe that the company's intention to push a portion of its
maturities to 2029 reduces refinancing risks over the next 24
months. The sizable cash on the balance sheet (at EUR403 million at
Dec. 31, 2023) comfortably exceeds the company's minimum cash
requirement, as well as its maturities over the next five years.
"The negative outlook reflects that we could lower the rating by
one notch if we do not see a deleveraging toward 6.5x starting from
next year.
"We could lower the rating if the group experienced margin
pressure, due to weaker-than-expected recovery in the operating
performance in the second half of 2024 and in 2025, leading to debt
to EBITDA remaining significantly above 6.5x for a long period. We
could also lower the rating if the company pursued any acquisition
that translates into an increase of adjusted debt or if it
distributes dividends to its shareholders, lowering available cash
to be spent on growth. However, we understand that BME currently
does not expect any transformational acquisitions or dividend
distributions in the near term.
"We could revise the outlook to stable in 2025 if we were to
anticipate that BME's leverage would improve toward 6.5x. We do not
anticipate an outlook revision in 2024."
NOBIAN FINANCE: Moody's Affirms 'B2' CFR, Alters Outlook to Pos.
----------------------------------------------------------------
Moody's Ratings changed the outlook on Nobian Finance B.V. to
positive from stable. Concurrently, Moody's affirmed Nobian's B2
corporate family rating and B2-PD probability of default rating, as
well as the B2 ratings for the backed senior secured term loan, the
backed senior secured global notes and the backed senior secured
multi-currency revolving credit facility (RCF).
RATINGS RATIONALE
The rating action reflects the company's solid point-in-time credit
metrics, including Moody's-adjusted debt/EBITDA of around 4.4x in
2023, and Moody's expectation for Nobian to maintain strong credit
metrics for its B2 rating over the next 12-18 months. The credit
profile is further supported by its good liquidity profile, with
EUR236 million of cash on balance and access to its EUR200 million
undrawn revolving credit facility (RCF) which matures in January
2026. The ratings and outlook incorporate the expectation that the
company will refinance its debt instruments well ahead of the
maturity date.
Nobian's management-adjusted EBITDA declined only moderately by
around 2% to EUR424 million in 2023 from EUR433 million in 2022.
Lower caustic soda prices and lower production volumes were largely
offset by higher prices for its vacuum salt. Moody's views Nobian's
performance in 2023 as strong in the context of the downturn in the
chemical industry.
The company increased prices for its vacuum salt in 2023 despite
lower volumes, leading to a higher earnings contribution from the
salt business to the overall group compared with historical levels.
The greater contribution from salt reduces the company's earnings
exposure to caustic soda prices, and Moody's anticipates higher
salt prices will persist, because of the limited availability of
alternative suppliers, regulatory burdens for new permits,
switching costs for customers and Nobian's cost position.
Nonetheless, Nobian's salt business remains dependent on a few
large customers.
Nobian has a proven track record of solid cash generation since the
rating assignment in 2021. The company generated positive
Moody's-adjusted free cash flow (FCF) of around EUR248 million in
2023, however Moody's definition of FCF does not include EUR200
million of loans to its parent, Nobian Coöperatief U.A. Moody's
views the parent loans as credit negative because cash left the
restricted group.
More generally, Nobian's B2 rating reflects positively the
company's leading market positions in chlor-alkali products in
Northwestern Europe; long-standing relationships and a high level
of integration with its key customers; and good liquidity.
However, the company's geographical concentration in Northwestern
Europe; exposure to volatile energy costs and caustic soda prices;
and some customer concentration constrain the credit profile. Event
and financial policy risk due to the private equity ownership,
including potential dividends, continues to weigh on the credit
profile.
RATING OUTLOOK
The positive outlook highlights the potential that a continued
solid operating trajectory and better visibility into the financial
policy could result in an upgrade. The outlook also incorporates
the expectation that the company will address its upcoming debt
maturities well ahead of the maturity date.
LIQUIDITY CONSIDERATIONS
Nobian's liquidity is good. As of the end of December 2023, the
company had around EUR236 million of cash on balance and access to
an undrawn EUR200 million RCF. In combination with forecast funds
from operations, these sources should be sufficient to cover
capital spending, working capital swings and working cash.
The company's next material debt maturity (excluding RCF) is in
July 2026 when the senior secured term loan and the senior secured
global notes mature. Moody's expects that the company will
refinance its debt instruments well ahead of the maturity date.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade ratings if (1) the company built a track
record and committed to financial policies leading to
Moody's-adjusted debt to EBITDA well below 5.0x on a sustained
basis; (2) Moody's-adjusted FCF/debt would be consistently in the
high single digits (%); (3) adjusted EBITDA/Interest remained above
2.5x; and (4) the company maintained a good liquidity.
Conversely, Nobian's ratings could be downgraded if its (1)
Moody's-adjusted debt/EBITDA increased above 6x on a sustainable
basis; (2) liquidity profile deteriorated, for instance as a result
of sustained negative FCF; (3) or Moody's-adjusted EBITDA interest
coverage declined below 2.0x.
The principal methodology used in these ratings was Chemicals
published in October 2023.
COMPANY PROFILE
Based in the Netherlands, Nobian is a vertically integrated leading
European producer of salt, essential base chemicals, and energy
solutions. It primarily focuses on its chlor-alkali products
(mainly chlorine and caustic soda), which accounted for around 60%
of its sales in 2023. In 2023, the company generated revenue of
around EUR1.7 billion and company-adjusted EBITDA of around EUR424
million. The company is owned by the private equity firm The
Carlyle Group (majority shareholder) and GIC Private Limited, a
Singaporean sovereign wealth fund.
SCHOELLER PACKAGING: S&P Affirms 'CCC+' ICR, Alters Outlook to Pos.
-------------------------------------------------------------------
S&P Global Ratings revised its outlook to positive from stable and
affirmed the 'CCC+' long-term rating on Schoeller Packaging B.V.
(Schoeller).
S&P subsequently withdrew its long-term issuer credit rating on
Schoeller at the company's request.
Schoeller refinanced its EUR250 million senior secured notes in
December 2023 through a combination of debt (five-year EUR125
million senior secured term loan) and equity. Schoeller also
extended the maturity of its EUR30 million revolving credit
facility by another four and a half years.
Schoeller's transaction addresses S&P's previous liquidity and
refinancing concerns, with S&P Global Ratings-adjusted debt
improving to EUR355 million from EUR446 million and prompting us to
estimate adjusted net debt to EBITDA at 8.7x for end-2023 (versus
9.6x under our previous forecasts).
Schoeller's December 2023 refinancing firmly placed its leverage on
a decreasing path. The company refinanced its EUR250 million senior
secured notes via a EUR125 million senior secured term loan
(provided by Strategic Value Partners [SVP]) and equity from its
main shareholders, Brookfield and Schoeller Industries. This
transaction reduced our calculation of Schoeller's debt to EUR355
million, resulting in S&P Global Ratings-adjusted leverage of about
8.7x for 2023. Furthermore, S&P expects EBITDA improvements to more
than offset additional increases in debt and leverage to decrease
to 6.5x by year-end.
S&P said, "The refinancing addressed our liquidity concerns. The
transaction improved Schoeller's liquidity, providing the company
with additional cash on balance sheet, extending the maturity of
its EUR30 million revolving credit facility (RCF) by four and half
years to June 2028, and removing the near-term debt repayment. We
now calculate that the company's liquidity sources will cover
liquidity uses by about 1.2x in the next 12 months, supporting our
assessment of less than adequate liquidity, versus weak
previously.
"We anticipate that Schoeller's EBITDA will improve materially in
2024.S&P Global Ratings-adjusted EBITDA will likely improve to
about EUR60 million in 2024 (from about EUR40 million in 2023), on
the back of the group's ongoing restructuring initiatives and a
recovery in demand. We expect a subdued recovery in Schoeller's key
markets in Europe (about 60% of sales) thanks to general
macroeconomic strengthening across the region. We factor into our
EBITDA calculations for 2024 some restructuring costs. Free
operating cash flow (FOCF) will remain negative due to working
capital outflows (about EUR10 million) and capital expenditure
(capex) at historic levels. In 2025 we anticipate adjusted EBITDA
to improve to EUR65 million-EUR75 million and adjusted FOCF to turn
positive (EUR5 million-EUR10 million).
"We expect leverage to remain stable in 2024-2025 but gross debt
will increase.Although the refinancing enabled Schoeller to
deleverage gross debt, we expect interest on the new EUR125 million
term loan (by SVP) and that accruing on various shareholder loans
will elevate gross debt. The Purchases of rental equipment, which
will be financed by third-party debt, will also have an impact. S&P
Global Ratings-adjusted debt will reach about EUR382 million by
end-2024. Our calculation includes the EUR132 million term loan
provided by SVP (to the manufacturing company), about EUR39 million
bank loans, lease liabilities (EUR37 million), as well as our
adjustments for sold receivables (EUR60 million), and pensions and
guarantees (EUR3 million). We view all shareholder loans as debt,
per our non-common equity criteria. As such, S&P Global
Ratings-adjusted debt also includes about EUR101 million drawings
under the shareholder loans provided by Brookfield.
"We have withdrawn the rating on Schoeller at the company's
request.
"At the time of the withdrawal, the outlook on the 'CCC+' rating on
Schoeller was positive. We took into account the company's improved
liquidity position, the lack of near-term maturities, and our
expectations of structural profitability and cash flow improvements
over the next 12-18 months, supported by Schoellers' restructuring
efforts.
"We think Schoeller's liquidity will remain supported by facilities
provided by Brookfield."
VEON LTD: Fitch Assigns 'BB-' LongTerm IDR, Outlook Negative
------------------------------------------------------------
Fitch Ratings has assigned VEON Ltd. (VEON) a Long-Term Issuer
Default Rating (IDR) of 'BB-' with a Negative Outlook. Fitch has
also assigned VEON Holdings B.V.'s senior unsecured notes an
instrument rating of 'BB-' with a Recovery Rating of 'RR4'.
The ratings reflect VEON's well-diversified revenue base across six
markets and market-share leadership. It has low leverage following
its exit from Russia and plans for further mobile tower
infrastructure sales, which could support further deleveraging.
Rating constraints are a weak operating environment and
foreign-exchange (FX) risks, including a mismatch between debt and
cash flow generation with inherent transfer and convertibility
(T&C) risks in some of its largest markets.
The Negative Outlook reflects that just under half of VEON's debt
is set to mature in the next 18 months, increasing execution risks.
A lack of progress in refinancing upcoming holding company
maturities in the next six to 12 months could lead to a downgrade.
Conversely, a successful refinancing along with stronger cash flows
from operations (CFO) less capex/total debt moving to positive
territory over 2025 could lead to the Outlook being revised to
Stable.
KEY RATING DRIVERS
Market Positions Support Business Profile: VEON holds leading
market positions in mobile services in four of its six markets
including in Ukraine and Pakistan, its two largest markets. Fitch
views market share as a key differentiator in overall revenue
visibility for telecom operators given the benefits of economies of
scale. VEON operates in markets where local-currency revenue growth
has been in the mid-to-high teens for the last two years. 4G
penetration is well below western Europe's but is set to increase,
driving average revenue per user growth along with supportive
demographics. VEON's wide-reaching local brand recognition and
capacity for commercial investments firmly positions it to capture
further market growth.
Low Leverage: Following the disposal of its Russian subsidiary PJSC
VimpelCom in 2023 and the subsequent paydown of debt during the
year, Fitch expects VEON to have ample leverage headroom for its
rating with Fitch-defined EBITDA net leverage remaining below 2x
between 2023 and 2026. This assumes that all debt transferred into
a 100% VEON-owned subsidiary following the VimpelCom sale will be
effectively cancelled on maturity without incurring further
payments and also that no payments are made to PJSC VimpelCom on
the approximately USD72 million equivalent notes still held by them
as deferred consideration. However, CFO less capex/total debt has
been mildly negative or volatile, which is weak for the rating.
Ukraine Deconsolidated; Headroom Remains: The Ukrainian subsidiary,
which operates the Kyivstar brand, has faced restrictions on
dividend repatriations since the implementation of martial law in
the country. With limited visibility on VEON's future access to
Ukrainian cash flows and ongoing legal matters concerning a freeze
on VEON's corporate rights in the country, Fitch analytically
deconsolidates Ukraine. With no debt remaining outstanding in
Ukraine, this will most notably include the removal of Ukraine's
contribution to consolidated EBITDA in its leverage and coverage
metrics, which Fitch expects to remain within its rating
sensitivities on a deconsolidated basis for at least the next four
years.
Refinancing Needed in Tougher Conditions: Nearly 50% of VEON's debt
or around USD1.6 billion, including its 2025 US dollar and Russian
rouble bonds and fully drawn revolving credit facilities (RCF),
will mature in the next 18 months. This debt is issued at the
holding company level where end-October 2023 cash was just under
USD1.4 billion. With no remaining RCF capacity, Fitch expects VEON
to at least partially refinance this debt in the absence of any
large asset sales. In a high interest-rate environment and weak
operating environments, Fitch expects the cost of refinancing to
increase, which may restrict free cash flow (FCF) growth.
Refinancing Risks Manageable: Fitch assesses refinancing risks as
manageable given holding company cash levels, low leverage and
modest EBITDA interest coverage for both the consolidated group and
with Ukraine deconsolidated. While interest rates on refinancing
are likely to increase, lower debt levels should see overall
interest payments reduce in 2024. Lower debt costs, increased
EBITDA and moderating capex as VEON approaches 70% 4G coverage
should lead to an improved FCF profile. However, this is subject to
T&C risks despite positive cash flow contribution from countries
with higher sovereign ratings, like Kazakhstan.
Audit Delays Increase Execution Risk: VEON announced that it
expects to be delayed in reporting its audited consolidated
financial statements for 2023. The delays arise from the
difficulties that VEON has faced in identifying a suitable auditor
due to the material changes in the group's portfolio of assets.
While Fitch assumes no negative repercussions on the group's
quality of earnings and Fitch expects the company to resolve this
during the year, nonetheless further delay in publication could
increase execution risk on refinancing.
Operating-Environment Constraints: VEON operates in countries
characterised by a fairly weak operating environment with weighted
average sovereign ratings at around 'B+' excluding Ukraine. Even in
the absence of T&C risks, Fitch deems the ratings of corporates
operating in such markets as being not much detached from the
respective sovereign ratings. Fitch believes that fragile economic
structures and uncertain regulation, among other risks, may
negatively affect VEON's business profile. Its rating thresholds
for VEON are therefore tighter than those for peers operating in
more developed markets.
Substantial FX Mismatch: VEON faces a significant mismatch between
its cash flows in local currencies and significant FX debt.
However, EBITDA generated in Kazakhstan, which has an
investment-grade Country Ceiling of 'BBB+', is sufficient to
comfortably cover gross interest payments, at the current level of
leverage.
Margin Growth Drivers: VEON's ongoing efficiency-improvement
efforts, in particular in headquarter headcount reductions, should
lead to a meaningful improvement in EBITDA margins from 2024. Costs
relating to network, IT and personnel, which are mostly fixed make
up the majority of operating expenses before depreciation and
amortisation and so margins should also benefit from expected
revenue growth given high operating leverage.
Diversified Asset Portfolio: VEON's geographically diversified
portfolio of operating assets provides some divestment flexibility
without dramatically changing its operating profile in the long
term. VEON has a mix of fast-growing developing markets, which have
supported mid-to-high teens local-currency revenue growth in the
last two years. Operating pressures in one country can often be
mitigated by strong performance in others.
DERIVATION SUMMARY
VEON benefits from established market positions across its
operating footprint. It is the leading mobile operator in various
high-growth emerging markets. Axian Telecom (B+/Stable) and Liquid
Telecommunications Holdings Limited (B/Negative) are peers that
operate in countries with weak operating environments. VEON has
more financial flexibility at its rating than these companies,
reflecting its stronger operating profile as a facilities-based
mobile operator with well-established or leading positions in all
of its markets.
With a weak mix of operating environments across its core markets,
Fitch views the rating as being broadly anchored to the credit
quality of its highest-rated market Kazakhstan and its access to
dollars from its subsidiary in that country. Compared with peers in
developed European markets, VEON's ratings reflect the negative
impact of the weaker operating environment mix, which restricts its
debt capacity for any given rating compared with operators like
Matterhorn Telecom Holding S.A. (BB-/Stable) or VodafoneZiggo Group
B.V. (B+/Stable).
KEY ASSUMPTIONS
- Mid-single-digit reported US dollar revenue growth across the
portfolio to 2026
- Fitch-defined EBITDA margins (including lease costs) rising to
around 40% by 2026, from an estimated 37% in 2023
- No dividends between 2023 and 2026
- Capex (including for spectrum) at USD800 million-USD900 million
per year between 2024 and 2026
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to an
Upgrade:
- Improvement in the operating environment of the countries in
which VEON is present or favourable change in the geographical mix
of cash flows, and continued strong market position in countries of
operation
- Improving cash flow profile such that CFO less capex/total debt
rises above 5% on a sustained basis
- Maintenance of a conservative capital-allocation policy and
leverage profile along with successful repayment or refinancing of
upcoming maturities
Factors That Could, Individually or Collectively, Lead to a
revision of Outlook to Stable:
- Successful refinancing of upcoming debt maturities in 2024 and
2025
- CFO less capex/total debt (post refinancing) expected to be
consistently in mid-single digits
- EBITDA net leverage at below 4.0x on a sustained basis after
deconsolidating Ukraine
Factors That Could, Individually or Collectively, Lead to a
Downgrade:
- Lack of progress in refinancing or repaying upcoming maturities
within the next 12 months
- CFO less capex/total debt in low single digits combined with
lower visibility on cash flow circulation across key subsidiaries
leading to weaker liquidity
- EBITDA net leverage sustained above 4.0x after deconsolidating
Ukraine
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity; Near-Term Maturities: VEON's liquidity as
of end-October 2023 was satisfactory with management reporting
USD1.7 billion of cash on balance sheet, of which USD1.3 billion
was held at the holding company. It has fully drawn down its
revolving credit facilities (RCFs), of which USD1.1 billion will
mature in the next 18 months along with around USD700 million of
bonds.
With sufficient holding company cash and expected dividends from
operating companies, holding company interest and operating costs
will be comfortably covered for the next two years. Fitch expects
VEON to at least partially refinance its upcoming maturities, which
Fitch believes will be supported by its low leverage and an
improving FCF profile.
ISSUER PROFILE
VEON is a facilities-based mobile network operator with leading or
well-established competitive positions in most of its countries of
operations including Pakistan, Ukraine, Kazakhstan, Bangladesh and
Uzbekistan.
DATE OF RELEVANT COMMITTEE
01 March 2024
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
VEON Holdings B.V.
senior unsecured LT BB- New Rating RR4 WD
VEON Ltd. LT IDR BB- New Rating WD
===========
S E R B I A
===========
DANUBE RIVERSIDE: Millenium Team Buys Business, Hotel Jugoslavija
-----------------------------------------------------------------
Iskra Pavlova at SeeNews reports that Serbian construction firm
Millenium Team said it has bought bankrupt Belgrade-based firm
Danube Riverside, including the historic Hotel Jugoslavija, with
plans to invest more EUR400 million (US$433 million) in developing
the hotel over the next four years.
"With an initial investment of more than EUR42 million, we
completed the takeover of the entire location of the former Hotel
Jugoslavija," SeeNews quotes Millenium Team as saying in a
statement on March 22.
"We have initiated the amendment of the detailed regulation plan,
so that we could construct a modern residential and business
complex with a high-category hotel, in a location that, after 25
years, absolutely deserves it. The total investments we are
planning for the next 4 years in this project amount to more than
400 million euro," according to the statement.
Serbia's bankruptcy supervision agency announced the sale of Danube
Riverside in February, saying that apart from Hotel Jugoslavija,
Danube Riverside assets include 45,613 square metres of land which
it owns jointly with MV Investment, SeeNews relates. The starting
price in the auction was set RSD3.18 billion (US$27.7
million/EUR25.6 million), SeeNews discloses. The estimated value
of bankruptcy debtor Danube Riverside as a legal entity is RSD6.35
billion, twice the minimum ask price in the tender, the bankruptcy
agency has said, SeeNews notes.
Local media reported over the weekend that Millenium Team bought
Danube Riverside and its assets at the call price, according to
SeeNews.
The commercial court in Belgrade launched bankruptcy proceedings
against Danube Riverside in November 2021, with bankruptcy
officially declared in May 2022, SeeNews recounts.
=========
S P A I N
=========
SANTANDER CONSUMER 2016-2: Moody's Ups Rating on E Notes from Ba1
-----------------------------------------------------------------
Moody's Ratings has upgraded the ratings of two Notes in FT
Santander Consumer Spain Auto 2016-2. 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 their current ratings.
EUR552.4M Serie A Notes, Affirmed Aa1 (sf); previously on Feb 24,
2023 Affirmed Aa1 (sf)
EUR26M Serie B Notes, Affirmed Aa1 (sf); previously on Feb 24,
2023 Affirmed Aa1 (sf)
EUR35.8M Serie C Notes, Affirmed Aa1 (sf); previously on Feb 24,
2023 Upgraded to Aa1 (sf)
EUR19.5M Serie D Notes, Upgraded to Aa2 (sf); previously on Feb
24, 2023 Upgraded to A1 (sf)
EUR16.3M Serie E Notes, Upgraded to Baa1 (sf); previously on Feb
24, 2023 Affirmed Ba1 (sf)
Maximum achievable rating is Aa1 (sf) for structured finance
transactions in Spain, driven by the corresponding local currency
country ceiling of the country.
RATINGS RATIONALE
The rating action is prompted by the decreased key collateral
assumptions, namely the portfolio Expected Loss (EL) assumptions,
due to better than expected collateral performance and by an
increase in credit enhancement for the affected tranches.
Revision of Key Collateral Assumptions
As part of the rating action, Moody's reassessed its default
probability and recovery rate assumptions for the portfolio
reflecting the collateral performance to date.
The performance of the transaction has continued to improve since
the last rating action. Total delinquencies have decreased in the
past year, with 60 days plus arrears currently standing at 1.29% of
current pool balance. Cumulative defaults currently stand at 1.93%
of original pool balance up from 1.69% a year earlier.
The default probability assumption is 4.5% of the current portfolio
balance reduced from previously 5.00% as of August 2023, the
assumption for the fixed recovery rate is 30.0% and the portfolio
credit enhancement assumption is maintained at 16.0%.
Increase in Available Credit Enhancement
Sequential amortization and a non-amortizing reserve fund led to
the increase in the credit enhancement available in this
transaction.
For instance, the credit enhancement for the most senior tranche
affected by the rating action, the Class D Notes, increased to
19.64% from 11.50% since the last rating action.
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Auto Loan- and Lease-Backed ABS" published in
November 2023.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include: (1) performance of the underlying collateral that
is better than Moody's expected, (2) an increase in available
credit enhancement, (3) improvements in the credit quality of the
transaction counterparties, and (4) a decrease in sovereign risk.
Factors or circumstances that could lead to a downgrade of the
ratings include: (1) an increase in sovereign risk, (2) performance
of the underlying collateral that is worse than Moody's expected,
(3) deterioration in the Notes' available credit enhancement, and
(4) deterioration in the credit quality of the transaction
counterparties.
=====================
S W I T Z E R L A N D
=====================
ESPRIT: Swiss Unit Collapses, Branches Face Closure
---------------------------------------------------
swissinfo.ch reports that the Swiss branch of the popular
high-street fashion retailer Esprit has gone bust, it was announced
on March 26.
According to swissinfo.ch, an official statement from Esprit said
the bankruptcy of the Swiss subsidiary and the closure of the
branches were "unavoidable".
"Global economic development, combined with a sharp increase in
energy and logistics costs as well as negative consumer sentiment
and, last but not least, the high rents for our branches,
ultimately made it impossible to continue our business,"
swissinfo.ch quotes Esprit Switzerland Retail as saying in a
statement. The Swiss Esprit subsidiary's over-indebtedness
amounted to around CHF12 million at the end of 2023.
Esprit clothes will continue to be available in 19 branches
operated by franchise partners and in 150 clothing stores with
various brands, the fashion group announced, swissinfo.ch notes.
According to the information, the company will now be reorganised
and will in the future concentrate on the online shop and trading
with franchise partners, swissinfo.ch discloses.
There is also a focus on "new impulses in e-commerce". The
management wants to remain present in online trading in
Switzerland, swissinfo.ch states.
Esprit Retail Switzerland AG is wholly owned by the fashion group
Esprit Holdings Limited, which is listed on the Hong Kong stock
exchange and has its legal headquarters in Bermuda.
===========
T U R K E Y
===========
AKBANK TAS: Fitch Puts 'CCC' Final LongTerm Rating, On Watch Pos.
-----------------------------------------------------------------
Fitch Ratings has assigned Akbank T.A.S.'s (Akbank, B/Positive)
issue of Basel III-compliant additional Tier 1 (AT1) notes, a final
long-term rating of 'CCC' and placed it on Rating Watch Positive
(RWP).
The assignment of the final rating follows the receipt of final
documents conforming to the information that Fitch has already
received.
KEY RATING DRIVERS
The AT1 notes are rated three notches below Akbank's Viability
rating (VR) of 'b', which is on RWP. The notching comprises two
notches for loss severity given the notes' deep subordination, and
one notch for incremental non-performance risk given their full
discretionary, non-cumulative coupons.
Fitch has used the bank's VR as anchor rating as Fitch deems it the
most appropriate measure of non-performance risk. In accordance
with the Bank Rating Criteria, Fitch has applied three notches from
Akbank's VR, instead of the baseline four notches, due to rating
compression, as Akbank's VR is below the 'BB-' threshold.
The notes are perpetual, deeply subordinated, fixed-rate resettable
AT1 debt securities, with fully discretionary, noncumulative
coupons and have a call option after five years. The notes are
subject to full or partial principal write-down if Akbank's common
equity Tier 1 (CET1) on a bank-only or group- basis ratio falls
below 5.125%.
In addition, the notes are subject to permanent partial or full
write-down, on the occurrence of a non-viability event (NVE). A NVE
is when a bank incurs a loss (on a consolidated or non-consolidated
basis) and the bank becomes, or it is probable that the bank will
become, non-viable as determined by the local regulator, the
Banking and Regulatory Supervision Authority (BRSA). The bank will
be deemed non-viable should it reach the point at which the BRSA
determines its operating license is to be revoked and the bank
liquidated, or the rights of the bank's shareholders (except to
dividends), and the management and supervision of the bank, are
transferred to the Savings Deposit Insurance Fund (SDIF) on the
condition that losses are deducted from the capital of existing
shareholders.
Akbank's Long-Term Foreign-Currency (LTFC) Issuer Default Rating
(IDR) is driven by its VR and is one notch below Turkiye's rating.
The notes are Akbank's first AT1 issue. Akbank has maintained
significant buffers relative to its regulatory capital
requirements. At end-2023, Akbank's 17.9% consolidated CET1 ratio
(including forbearance), which is the same as it Tier 1 capital
ratio, and its 21% consolidated total capital adequacy ratio
(including forbearance), were significantly above their 8.5% CET1
and 12% total capital regulatory requirements, respectively,
including a capital conservation buffer of 2.5% and a domestic
systemically important bank buffer of 1.5%.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The rating of the notes is primarily sensitive to changes to
Akbank's VR.
The AT1 rating is also sensitive to change in Fitch's assessment of
the notes' non-performance relative to the risk captured in the VR.
This may result, for example, from a significant decline in capital
buffers relative to regulatory requirements.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
The rating of the notes is sensitive to an upgrade of Akbank's VR.
DATE OF RELEVANT COMMITTEE
12 March 2024
ESG CONSIDERATIONS
The ESG Relevance Score for Management Strategy of '4' reflects an
increased regulatory burden on all Turkish banks. Management
ability across the sector to determine their own strategy and price
risk is constrained by increased regulatory interventions and also
by the operational challenges of implementing regulations at the
bank level. This has a moderately negative impact on banks' credit
profiles and is relevant to banks' rating in combination 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. Fitch's ESG Relevance Scores are not inputs
in the rating process; they are an observation on the relevance and
materiality of ESG factors in the rating decision.
Entity/Debt Rating
----------- ------
AKBANK T.A.S.
Subordinated LT CCC New Rating
[*] Fitch Hikes LongTerm IDR on 11 Bank-Owned Turkish NBFIs to 'B'
------------------------------------------------------------------
Fitch Ratings has upgraded the Long-Term Foreign-Currency Issuer
Default Ratings (LTFC IDRs) of 11 bank-owned Turkish NBFIs to 'B'
from 'B-'. Fitch has also upgraded the Long-Term Local-Currency
(LTLC) IDRs of six foreign-bank-owned NBFI subsidiaries to 'B+'
from 'B'. All Outlooks are Positive. Fitch has placed the LTLC IDRs
of five privately-owned bank subsidiaries on Rating Watch Positive
(RWP), mirroring the action on their parents.
The issuers' National Ratings are unaffected by the rating actions
but may be reviewed if Fitch's National Ratings equivalency
analysis results in different relative creditworthiness across
Turkish issuers.
The rating actions follow the upgrade of Turkiye's Long-Term IDRs
and subsequent rating actions on the parent banks (see 'Fitch
Upgrades Turkiye to 'B+'; Outlook Positive' dated 8 March 2024 and
'Fitch Upgrades 18 Turkish Banks; Places 5 VRs on Rating Watch
Positive on Sovereign Upgrade dated 15 March 2024).
The foreign-bank owned subsidiaries are Alternatif Finansal
Kiralama A.S.'s (Alternatif Leasing), Deniz Finansal Kiralama A.S.
(Deniz Leasing), QNB Finans Faktoring A.S. (QNB Faktoring), QNB
Finans Finansal Kiralama A.S. (QNB Leasing), Garanti Faktoring A.S,
Garanti Finansal Kiralama A.S. (Garanti Leasing). The
privately-owned bank subsidiaries are Ak Finansal Kiralama A.S. (Ak
Leasing), Is Finansal Kiralama Anonim Sirketi (Is Leasing), Yapi
Kredi Faktoring A.S. (Yapi Faktoring), Yapi Kredi Finansal Kiralama
A.O. (Yapi Kredi Leasing) and Yapi Kredi Yatirim Menkul Degerler
A.S. (Yapi Kredi Yatirim).
KEY RATING DRIVERS
Support-Driven Ratings: The Long-Term IDRs and Shareholder Support
Ratings (SSRs) are equalised with those of their parents,
reflecting Fitch's view that they are core and highly integrated
subsidiaries. The Positive Outlooks and RWP mirror the Outlooks and
RWP on the parents, which in turn reflect the impact of improving
operating environment on the credit profiles of their banking
groups.
Fitch is not able to assess the subsidiaries' intrinsic strength as
all companies are highly integrated into their respective parents
and their franchises rely heavily on their parents. The ratings are
underpinned by potential shareholder support, but LTFC IDRs are
capped at 'B' by their parents' LTFC IDRs, underlining intervention
risk from the Turkish government.
Highly Integrated Subsidiaries: The ratings of the NBFI
subsidiaries reflect their close integration with their parents,
reputational risks of their defaults for their broader groups, and
their ultimate full or majority ownership by their respective
parents. The subsidiaries offer core products and services
(leasing, factoring and investment services) in the domestic
Turkish market.
High Support Propensity: The cost of support would be limited as
the subsidiaries are small compared with their parents and total
assets usually do not exceed 3% of group assets. Together with the
other support factors this means Fitch believes the parents'
propensity to support remains very high. However, the ability to
support is limited by the respective parents' creditworthiness as
reflected in their ratings
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The subsidiaries' Long-Term IDRs are sensitive to a downgrade of
their parents' Long-Term IDRs or to a deterioration in the
operating environment, which, for example, could be triggered by a
sovereign downgrade.
The ratings could be notched down from their parents on material
deterioration in the parents' propensity or ability to provide
support or if the subsidiaries become materially larger relative to
the parents' ability to support.
The ratings could also be notched down from their parents' if the
subsidiaries' strategic importance is materially reduced through,
for example, a substantial reduction in operational and management
integration or ownership, or a prolonged period of
under-performance.
The RWP on the LTLC IDRs signal a heightened probability of
upgrades of the LTLC IDRs of the parents, given improvement in the
Turkish operating environment. Fitch will resolve the RWP on the
subsidiaries once the RWP on the parent banks are resolved.
A downgrade of the parents' National Ratings would also be likely
to be mirrored in the subsidiaries' ratings.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Upgrades of the parents' ratings or a revision of the Outlooks
would be reflected in the subsidiaries' ratings.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The entities' ratings are linked to their parent bank's ratings.
ESG CONSIDERATIONS
All issuers in this rating action have an ESG Relevance Score of
'4' for Management Strategy in line with their respective parents'
Management and Strategy ESG Relevance Score. The score reflects
increased regulatory intervention in the Turkish banking sector,
which hinders the operational execution of the parent' s management
strategy, constrains management's ability to determine strategy and
price risk, and creates an additional operational burden for the
respective parent banks. The alignment reflects Fitch's view of
high integration.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Is Finansal
Kiralama Anonim
Sirketi LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B Rating Watch On B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
QNB Finans
Finansal
Kiralama A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B+ Upgrade B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
Ak Finansal
Kiralama A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B Rating Watch On B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
Yapi Kredi
Finansal
Kiralama A.O. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B Rating Watch On B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
Alternatif
Finansal
Kiralama A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B+ Upgrade B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
Garanti
Finansal
Kiralama A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B+ Upgrade B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
Yapi Kredi
Faktoring A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B Rating Watch On B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
QNB Finans
Faktoring A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B+ Upgrade B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
Yapi Kredi
Yatirim Menkul
Degerler A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B Rating Watch On B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
Deniz Finansal
Kiralama A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B+ Upgrade B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
Garanti
Faktoring A.S. LT IDR B Upgrade B-
ST IDR B Affirmed B
LC LT IDR B+ Upgrade B
LC ST IDR B Affirmed B
Shareholder Support b Upgrade b-
[*] Fitch Raises LT FC IDRs on 17 Turkish Banks to 'B'
------------------------------------------------------
Fitch Ratings has upgraded 17 Turkish banks' Long-Term (LT) Foreign
Currency (FC) Issuer Default Ratings (IDRs) to 'B' and Turkiye
Kalkinma ve Yatirim Bankasi A.S.'s (TKYB) to 'B+'. Fitch has also
has upgraded 16 banks' LT Local-Currency (LC) IDRs to 'B+'. The
Outlooks on 25 banks' LTFC IDRs and 23 banks's LTLC IDRs are
Positive. Five banks' VRs and three banks' LTLC IDRs have been
placed on Rating Watch Positive.
Fitch has upgraded Turkiye Halk Bankasi A.S.'s (Halk) LTLC IDR to
'B+', while maintaining its LTLC and LTFC IDRs on Rating Watch
Negative (RWN) due to ongoing US legal proceedings. Fitch has also
upgraded Turkland Bank A.S.'s LTFC IDR but maintained the bank's LT
IDRs on RWN, reflecting its planned sale.
The 18 upgraded banks are Akbank T.A.S.(Akbank); Alternatifbank
A.S. (Alternatif); Denizbank A.S. (Denizbank); ING Bank A.S.
(INGBT); Burgan Bank A.S. (BBT); Turkland Bank A.S. (T-Bank);
Kuveyt Turk Katilim Bankasi A.S (Kuveyt Turk); QNB Finansbank
Anonim Sirketi (QNBF); T.C. Ziraat Bankasi A.S. (Ziraat); Ziraat
Katilim Bankasi A.S. (Ziraat Katilim); Turk Ekonomi Bankasi A.S.
(TEB); Turkiye Finans Katilim Bankasi A.S. (Turkiye Finans);
Turkiye Garanti Bankasi A.S. (Garanti BBVA); Turkiye Is Bankasi
A.S. (Isbank); Turkiye Vakiflar Bankasi T.A.O. (Vakif); Yapi ve
Kredi Bankasi A.S. (YKB); Turkiye Ihracat Kredi Bankasi A.S. (Turk
Eximbank); Turkiye Kalkinma ve Yatirim Bankasi A.S. (TKYB).
In addition, Fitch has affirmed the LTFC IDRs and revised the
Outlooks to Positive for Albaraka Turk Katilim Bankasi A.S.
(Albaraka), Arap Turk Bankasi A.S. (ATB), Anadolubank A.S.
(Anadolu), Fibabanka Anonim Sirketi. (Fiba), Odea Bank A.S. (Odea),
Sekerbank T.A.S. (Seker), Vakif Katilim Bankasi A.S. (Vakif
Katilim) and Turkiye Emlak Katilim Bankasi A.S. (Emlak Katilim).
Fitch has also placed Turkiye Sinai Kalkinma Bankasi A.S.' (TSKB)
LTFC IDR on RWP.
The rating actions follow the upgrade of Turkiye's Long-Term IDR to
'B+' from 'B' (see 'Fitch Upgrades Turkiye to 'B+'; Outlook
Positive' dated 8 March 2024). The sovereign upgrade reflects
increased confidence in the durability and effectiveness of
policies implemented since the authorities' pivot in June 2023,
including greater-than-expected frontloading of monetary policy
tightening and effectiveness in reducing macroeconomic and external
vulnerabilities. It also reflects reduced external liquidity risks,
although the structure of sovereign FX reserves remains weak. The
Positive Outlook reflects Fitch's expectation that Turkiye's
overall macroeconomic policy stance should be consistent with a
significant decline in inflation (albeit inflation will likely
remain significantly higher than rating peers), as well as a
continued reduction in external vulnerabilities in terms of lower
current account deficits and stronger liquidity buffers.
Fitch considers the near-term likelihood of government intervention
in the banking system to have reduced as a result of the easing of
external financing and near-term financial stability risks. This
has driven the upgrade of the foreign-owned Turkish banks
(Alternatif, BBT, Garanti BBVA; INGBT; QNBF; TEB; Denizbank; Kuveyt
Turk; Turkiye Finans; T-Bank). Nevertheless, in case of marked
deterioration in the country's external finances, Fitch continues
to believe that the probability of some form of government
intervention in the banking system that might impede banks' ability
to service their FC obligations remains higher than that of a
sovereign default and this continues to drives the one-notch
difference between Turkiye's and Turkish banks' (with the exception
of TKYB) LTFC IDRs.
The Outlooks on all foreign-owned banks' (with the exception of
T-Bank; maintained on RWN) are Positive mirroring the sovereign
Outlook. The RWN on T-Bank's ratings reflects the likelihood that
the bank's IDRs will be downgraded if its acquisition is completed,
as Fitch would no longer factor in potential support from its
Jordan-based 50% owner, Arab Bank Plc. At that point T-Bank's
ratings would be driven by its VR, given that Fitch cannot reliably
assess the potential new owner's ability or propensity to provide
support to the bank.
The VRs of Ziraat and Vakif, the two state-owned domestic
systemically important banks, have been upgraded to 'b' from 'b-',
in line with the upgrade of the operating environment score to
'b'/positive from 'b-', reflecting its view that operating
environment pressures have abated amid Turkiye's sustained policy
revision and reduced external funding pressures. As the banks' LTFC
IDRs are driven by their VRs, this has also driven the upgrade of
their LTFC IDRs to 'B' with a Positive Outlook.
The 'b' VRs of four DSIBs (Akbank, Isbank, YKB, Garanti), and the
'b-' VR of one privately-owned development bank (TSKB), have been
placed on RWP following the sovereign upgrade. This reflects its
expectation that the improvement in the operating environment,
reduction in macroeconomic and financial stability risks amid
policy normalisation and notwithstanding still high inflation, and
ensuing increased external market access for Turkish banks should
further strengthen these banks' business and funding and liquidity
profiles.
Fitch has maintained Halk's ratings on RWN, reflecting its view of
the material risk of the bank becoming subject to a fine or other
punitive measure as a result of ongoing US legal proceedings, and
uncertainty over the sufficiency and timeliness of support from the
authorities if needed. Fitch expects to resolve the RWN once there
is clarity on the outcome of the US investigations and the
implications this may have for the bank. Fitch may maintain the RWN
for longer than six months if the US investigations are extended
for a longer period.
The National Ratings (NRs) are unaffected by these rating actions
and may be reviewed once and if its NR equivalency analysis results
in different relative creditworthiness across Turkish issuers.
KEY RATING DRIVERS
VRs (Akbank; Alternatif, Albaraka, ATB , Anadolubank, BBT,
Denizbank, Fiba, Emlak, INGBT, Kuveyt Turk, Odea, QNBF, Sekerbank,
TEB, TFKB, Garanti BBVA, Isbank, Turkland, Vakif Katilim, YKB,
Ziraat Katilim)
The VRs of the banks range from 'ccc+ (Turkland)' to 'b' (Isbank,
Akbank, YKB, Garanti and ING) and reflect their exposure to the
volatile Turkish operating environment, but also their largely
satisfactory financial metrics, reflected in generally adequate
asset quality, good profitability, reasonable capitalisation and
acceptable FC liquidity buffers.
For 'b' rated banks (with VRs that were in line with the sovereign
rating prior to its upgrade), their standalone credit profiles are
underpinned by their solid franchises and in most cases records of
stable and sound performance. Conversely, banks with VRs of 'b-' or
below have narrower franchises and have exhibited greater
volatility in their results to varying degrees. QNBF and TEB's VRs
are below their 'b' implied VRs, reflecting the capitalisation and
leverage constraint.
The RWP on the VRs of Akbank, Garanti BBVA, Isbank, YKB (rated 'b')
and TSKB ('b-') reflect its expectation that the improvement in
operating environment conditions and increasing macro stability -
as reflected in the upgrade of the operating environment score -
should positively impact these banks' credit profiles,
strengthening their franchises and underpinning their external
market access and funding and liquidity profiles.
Nevertheless, operating environment risks remain given Turkish
banks' varying reliance on external FC wholesale funding amid
exposure to investor sentiment, still high though declining sector
deposit dollarisation, given risks to banks' FC liquidity amid
reliance on FX swaps with the Central Bank of Republic of Turkiye
and high sector FC lending, given the impact of potential further
lira depreciation on asset quality.
VRs (Ziraat, Vakif, TSKB); IDRS, GSRs AND SENIOR UNSECURED DEBT
RATINGS OF STATE-OWNED COMMERCIAL (Ziraat; Vakif; Halk; Vakif
Katilim; and Emlak Katilim) AND DEVELOPMENT BANKS (Turk Eximbank;
TKYB); TSKB; SSR OF TSKB
The LTFC IDRs of Ziraat and Vakif have been upgraded to 'B' from
'B-' as a result of the upgrade of their VRs in line with the
upgrade of the operating environment score to 'b/positive'. As
large, systemically important state-owned banks with an important
role in supporting government policy, Fitch considers the banks'
credit profiles, and the strength of their capital and FC liquidity
buffers, to be commensurate with the risks of the Turkish operating
environment, notwithstanding their significant franchises (ranked
first and second by total assets).
TSKB's 'B-' LTFC IDR has been placed on RWP in line with its VR
reflecting its expectation that the improvement in operating
environment conditions, increased macro stability and banks'
increased access to external markets (TSKB is fully wholesale
funded and does not have a deposit licence) is likely to positively
impact the bank's financial profile.
The LTFC IDRs of TKYB and Turk Eximbank are driven by their
Government Support Ratings (GSR) have been upgraded to 'B+' and
'B', respectively. The Positive Outlooks reflect that on the
sovereign.
TKYB's 'B+' LTFC IDR is equalised with the sovereign rating,
despite Turkiye's weak net foreign exchange (FX) reserves position,
reflecting the bank's small size relative to sovereign resources,
still largely treasury-guaranteed funding base and the medium-term
tenor of its non-guaranteed funding (as a result of which its
potential need for support in the near term should be limited).
Turk Eximbank's GSR of 'B' is one notch below Turkiye's LTFC IDR,
despite its strategic policy role as the country's export credit
agency, reflecting its considerably larger balance sheet and
volumes of external market funding relative to sovereign
resources.
The senior unsecured debt ratings of Ziraat, Vakif, Turk Eximbank
have been upgraded, while that of TSKB has been affirmed, in line
with the banks' LTFC IDRs.
The GSRs of Ziraat, Vakif, Emlak Katilim, TSKB and Vakif Katilim
have been upgraded to 'b-' from 'ns' reflecting the improvement in
the sovereign's external finances and financial flexibility to
provide support in FC. Nevertheless, the banks' GSRs remain two
notches below the sovereign LTFC IDR despite a high propensity to
provide support - given the banks' state ownership (except for
TSKB; privately-owned), policy roles (Ziraat and TSKB), systemic
importance (Ziraat and Vakif), state-related or state-guaranteed
funding, the strategic importance of participation banking to the
authorities (Emlak Katilim, Vakif Katilim) and the record of
capital support - and reflects the sovereign's still weak FX
reserves position.
The LTLC IDRs of state-owned commercial banks (Ziraat, Vakif, Halk,
Emlak Katilim and Vakif Katilim) and development banks (TKYB and
Eximbank) and privately-owned TSKB, are driven by government
support and have been upgraded to 'B+' from 'B' with Positive
Outlooks, in line with the sovereign LTLC IDR, and one notch above
their LTFC IDRs (except TKYB). Halk's LTLC IDR remains on RWN due
to the US legal case. The equalisation of the banks' LTLC IDRs with
Turkiye's LTLC IDR reflects the sovereign's stronger ability to
provide support and the lower risk of government intervention in
LC, in its view.
TSKB's Shareholder Support Rating (SSR) has been upgraded to 'b-'
from 'ccc+' following the upgrade of its parent, Isbank, to
'B'/Positive. The SSR is one notch below its parent's rating
reflecting TSKB's niche business model and Isbank group's only 50%
stake in the bank.
All Short-Term (ST) IDRs have been affirmed at 'B', which is the
only possible option for LT IDRs in the 'B' rating category.
IDRs, SENIOR DEBT RATINGS, GSRs OF LARGE PRIVATELY-OWNED TURKISH
BANKS (Akbank, Isbank, YKB)
The LTFC IDRs of Akbank, Isbank, YKB, driven by their VRs, have
been upgraded to 'B' from 'B-' reflecting its view of reduced
government intervention risk following the sovereign upgrade. The
banks' ratings continue to be notched once below Turkiye's
sovereign. The Positive Outlooks on the three banks' LTFC IDRs
mirror that on the sovereign and on the operating environment. The
banks' 'B' LTLC IDRs, also driven by their VRs, have been placed on
RWP.
The senior unsecured debt ratings of Akbank, Isbank and YKB have
been upgraded in line with their FC IDRs.
The banks' Short-Term (ST) IDRs have been affirmed at 'B', the only
possible option for LT IDRs in the 'B' rating category.
The three banks' GSRs of 'ns' reflect its view that notwithstanding
their systemic importance, support from the Turkish authorities in
FC cannot be relied upon given the sovereign's weak financial
flexibility.
IDRs, SSRs AND SENIOR UNSECURED DEBT RATINGS OF FOREIGN-OWNED BANKS
(Alternatif, BBT, Garanti BBVA; INGBT; QNBF; TEB; Denizbank; Kuveyt
Turk, Turkiye Finans and Turkland)
The LT IDRs of all 10 foreign-owned banks are driven by potential
shareholder support - as reflected in their SSRs - based on the
varying degrees of strategic importance to their respective
parents, integration, ownership, roles within their groups, and for
some, common branding and legal commitments. INGBT and Garanti
BBVA's 'B' LT IDRs are also underpinned by their VRs.
The upgrade of the foreign-owned Turkish banks' LTFC IDRs to 'B'
from 'B-' and SSRs to 'b' from 'b-', reflect the improvement in
Turkiye's external finances position and as a result, reduced
government intervention risk in the banking sector, in its view.
Nevertheless, the banks' ratings continue to be notched once below
Turkiye's LTFC IDR due to government intervention risks. The
Positive Outlooks on the banks' LT IDRs mirror that on the
sovereign.
All 10 banks' LTLC IDRs have been upgraded to 'B+' from 'B' on the
basis of shareholder support, one notch above their respective LTFC
IDRs, reflecting its view of a lower likelihood of government
intervention in LC.
Senior debt ratings, where assigned, remain aligned with the banks'
IDRs reflecting average recovery prospects in case of default.
IDRS, SENIOR DEBT RATINGS AND GSRS OF SMALL PRIVATELY-OWNED TURKISH
BANKS (Albaraka, ATB, Anadolubank, Fiba, Odea, Sekerbank)
The IDRs of the six small, privately-owned Turkish banks, are
driven by their VRs and have been affirmed at 'B-' with their
Outlooks revised to Positive from Stable. This reflects its
expectation of the positive impact over the medium term of the
improving operating environment on the banks' intrinsic credit
profiles, and particularly their financial and business profiles.
The banks' 'B' Short-Term (ST) IDRs have been affirmed at 'B', the
only possible option for LT IDRs in the 'B' rating category.
The banks' GSRs of 'ns' reflect its view that state support cannot
be relied upon, in case of need, given the banks' limited systemic
importance. In Odea's case, support from parent Bank Audi SAL also
cannot be relied on given the financial crisis in Lebanon. In Arap
Turk's case, support from shareholders, while possible, also cannot
be relied upon given the political situation in Libya.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
VRs
The banks' VRs are potentially sensitive to a multi-notch sovereign
downgrade but this is not its base case.
The 'b' VRs of Akbank, Garanti BBVA, INGBT, Isbank and YKB would
likely be affirmed and removed from RWP if Fitch views their
business profiles, capital and FC liquidity buffers to be only
commensurate with the risks of the Turkish operating environment.
The 'b' VRs of Ziraat and Vakif are primarily sensitive to the
Turkish operating environment. The VRs could be downgraded due a
marked deterioration in the operating environment, particularly if
this leads to a material erosion of their FC liquidity buffers, for
example, due to a prolonged funding-market closure or deposit
instability, or of their capital buffers, if not offset by
government support.
The 'b-' VRs of Alternatif, Albaraka, ATB, Anadolubank, BBT,
Denizbank, Fiba, Emlak Katilim, Kuveyt Turk, Odea, QNBF, Sekerbank,
TEB, TFKB, TSKB and Vakif Katilim are sensitive to a multi-notch
downgrade of the operating environment. The banks' VRs could also
be downgraded in case of a material deterioration in their FC
liquidity and capitalisation buffers, potentially due to a
weakening in financial performance and asset quality, in turn
leading to a material weakening of banks' business profiles.
Turkland's 'ccc+' VR could be downgraded due to an erosion in its
capital buffer, for example, through significant deterioration of
asset quality and profitability, or a weakening of its FC liquidity
position, if not offset by shareholder support.
Halk's VR could also be downgraded if as a result of the US
investigations, it becomes subject to a fine or other punitive
measure that materially weakens its solvency or negatively affects
its standalone credit profile. The removal of the bank's rating
from RWN is dependent upon increased certainty that the outcome of
the investigations will not materially weaken Halk's capital, or
other aspects of its credit profile.
LT IDRs AND GSRs OF TKYB AND TURK EXIMBANK AND SENIOR UNSECURED
DEBT RATING OF TURK EXIMBANK
TKYB's GSR is directly sensitive to a downgrade of Turkey's LTFC
IDR. It could also be downgraded if the bank's proportion of
non-guaranteed funding increases materially - particularly if Fitch
believes this to be indicative of a weakening in TKYB's policy role
- or if its balance-sheet size sharply increases relative to
sovereign resources.
A sovereign downgrade would likely trigger similar rating action on
Turk Eximbank, particularly if it reflects a further weakening in
the sovereign's ability to provide support in FC. A material
weakening in Turk Eximbank's policy role could also result in a
downgrade of its LTFC IDR, but this is not its base case.
The LTLC IDRs of Turk Eximbank and TKYB are primarily sensitive to
a sovereign downgrade, but also a change in the ability or
propensity of the authorities to provide support in LC and to its
view of government intervention risk in LC.
Turk Eximbank's senior unsecured debt rating is sensitive to a
negative change in its IDR.
LONG-TERM IDRs, GSRs, SSR (TSKB) AND SENIOR UNSECURED DEBT RATINGS
OF STATE-OWNED COMMERCIAL AND PARTICIPATION BANKS AND DEVELOPMENT
BANKS (Ziraat, Vakif, Halk, Vakif Katilim, Emlak Katilim and TSKB)
The LTFC IDRs of Ziraat and Vakif, are sensitive to a change in
their VRs, Fitch's view of government intervention risk in the
banking sector and, potentially a sovereign downgrade (not Fitch's
base case given the Positive Outlook).
The LTFC IDRs of Halk, Vakif Katilim and Emlak Katilim are
sensitive to a change in their VRs. In the case of Vakif Katilim
and Emlak Katilim's their LTFC IDRs would only be downgraded if
their GSRs were simultaneously downgraded.
The RWN on Halk's IDRs reflects uncertainty surrounding the
sufficiency and timeliness of support from the Turkish authorities
in case of the bank becoming subject to a fine or other punitive
measure as a result of the US legal proceedings.
All state-owned banks' GSRs (with the exception of Halk) could be
downgraded if the reliability of support in FC from the Turkish
authorities weakens.
The LTLC IDRs of Ziraat, Halk, Vakif, Vakif Katilim, Emlak Katilim
and TSKB are primarily sensitive to a downgrade of the sovereign's
LTLC IDR, but also a change in the ability or propensity of the
authorities to provide support in and to its view of government
intervention risk in LC.
TSKB's SSR is sensitive to a change in Isbank's LTFC IDR and
Fitch's view of the parent's ability and propensity to provide
support.
All banks' senior unsecured debt ratings, where relevant, are
primarily sensitive to changes in their respective IDRs.
LONG-TERM IDRs AND SENIOR UNSECURED DEBT RATINGS OF PRIVATELY-OWNED
TURKISH BANKS (Akbank, Isbank, YKB, Albaraka, Seker, Odea, Fiba and
Anadolubank)
The LTFC and LTLC IDRs of all privately-owned Turkish banks are
sensitive to negative changes in their respective VRs and to its
view of government intervention risk in the sector.
The banks' senior unsecured debt ratings, where relevant, are
sensitive to changes in their respective IDRs.
LONG-TERM IDRs, SSRs AND SENIOR UNSECURED DEBT RATINGS OF
FOREIGN-OWNED BANKS (Garanti BBVA, INGBT, QNBF, TEB, Deniz, Kuveyt
Turk, Turkiye Finans, Alternatifbank, BBT and Turkland)
An increase in its view of government intervention risk would
likely lead to downgrades of the foreign-owned banks' (Garanti
BBVA, INGBT, QNBF, TEB, Deniz, Kuveyt Turk, Turkiye Finans,
Alternatifbank and BBT) SSRs and therefore Long-Term IDRs, although
this is not its base case.
Turkland's LT IDRs will be downgraded to the level of its VR if its
sale is completed. In addition, negative rating action on Turkiye's
sovereign ratings or an increase in its view of government
intervention risk would likely lead to a downgrade of Turkland's
LTFC IDRs. Turkland's LTLC IDR is sensitive to its SSR. The SSR is
also sensitive to an adverse change in Fitch's view of AB's ability
and propensity to provide support.
The SSRs of Garanti BBVA, INGBT, QNBF, TEB, Deniz, Kuveyt Turk,
Turkiye Finans, Alternatifbank and BBT are also sensitive to
Fitch's view of their respective shareholders' ability and
propensity to provide support.
The banks' senior unsecured debt ratings, where assigned, are
sensitive to changes in their IDRs.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
LT IDRs AND GSRs OF TKYB AND TURK EXIMBANK AND SENIOR UNSECURED
DEBT RATING OF TURK EXIMBANK
An upgrade of Turkiye's LT IDRs would likely lead to upgrades of
these banks' LT IDRs and GSRs. A material improvement in Turkiye's
external finances or its net FX reserves position resulting in a
marked strengthening in the sovereign's ability to support banks in
FC could also lead to an upgrade of Turk Eximbank's GSR and
equalisation of its LTFC IDR with Turkiye's sovereign rating.
Turk Eximbank's senior unsecured debt rating is sensitive to an
upgrade of its IDR.
VRs, GSRS, LT IDRs of ZIRAAT, VAKIF, HALK, TSKB, Emlak Katilim,
Vakif Katilim, and SENIOR UNSECURED DEBT RATINGS of Ziraat, Vakif
and TSKB; SSR of TSKB
Further improvement in the operating environment, which could
result from sustained market- and exchange-rate stability, a
sustainable decline in inflation and further easing of
macroprudential regulations could result in upgrades of the banks'
VRs, particularly if combined with a reduction in risk appetites
and government influence over strategy in the case of state-owned
commercial banks and an improvement in capital, earnings and an
improvement in Vakif Katilim and Emlak Katilim's business profiles.
However, LTFC IDR upgrades would require Fitch to believe that the
risk of government risk in the banking sector has fallen. An
upgrade of the sovereign's LTLC IDR would likely lead to upgrades
of these banks' LTLC IDRs.
The banks' GSRs could be upgraded if Fitch views the government's
ability to support the banks in FC as stronger.
The banks' senior unsecured debt ratings, where relevant, are
sensitive to upgrades of their respective IDRs.
VRs, GSRs, LT IDRs of Akbank, Isbank, YKB, Albaraka, Seker, Odea,
Fiba, Anadolubank and ATB and SENIOR UNSECURED DEBT of Akbank,
Isbank and YKB
VRs are primarily sensitive to the strength of banks' capital
buffers (including net of forbearance) and FC liquidity buffers in
the context of improving operating environment conditions. VR
upgrades for Seker, Odea, Fiba and Anadolu would also require a
strengthening of the banks' business profiles.
VR upgrades for Akbank, Isbank and YKB would also depend on Fitch's
assessment of whether the banks' standalone credit profiles are
sufficiently robust to equalise their ratings with the sovereign at
the higher rating level of 'B+'. Fitch expects to resolve the RWP
on Akbank, Isbank and YKB in the next six months.
Further upgrades of Turkiye's LT IDRs could lead to further
upgrades of the three banks' LT IDRs, particularly if this leads to
further improvement in the operating environment.
The GSRs of Akbank, Isbank and YKB could be upgraded, due to their
systemic importance, from 'no support' if Fitch views the
government's ability to support the banks in FC as stronger.
Albaraka, Seker, Odea, Fiba and Anadolubank's GSRs of 'no support'
are unlikely to be upgraded given their limited systemic
importance.
The banks' senior unsecured debt ratings, where relevant, are
sensitive to changes in their IDRs.
VRs, IDRs AND SSRs OF FOREIGN-OWNED BANKS (Garanti BBVA; INGBT;
QNBF; TEB; Denizbank; Kuveyt Turk; Turkiye Finans, Alternatifbank,
BBT, Turkland), VR OF GARANTI BBVA, SENIOR UNSECURED DEBT OF
Garanti BBVA; QNBF; TEB; Denizbank
An upgrade of Turkiye's LT IDRs would likely lead to upgrades of
all banks' SSRs and LT IDRs.
A material improvement in Turkiye's external finances or a marked
improvement in its net FX reserves position, resulting in a
reduction in its view of government intervention risk in the
banking sector, could lead to upgrades of the banks' SSRs and LTFC
IDRs to the level of Turkiye's LTFC IDR.
VRs are primarily sensitive to the strength of banks' capital
buffers (including net of forbearance) and FC liquidity buffers in
the context of improving operating environment conditions. In the
case of Alternatifbank, BBT and Turkiye Finans, VR upgrades would
also require a strengthening of banks' business profiles.
In the case of Garanti BBVA and INGBT, VR upgrades would also
depend on Fitch's assessment of whether the banks' standalone
credit profiles are sufficiently robust to equalise their ratings
with the sovereign at the higher rating level of 'B+'. Fitch
expects to resolve the RWP on Garanti BBVA in the next six months.
Turkland's LT IDRs could be removed from RWN and affirmed if Fitch
deems that AB's ability and propensity to provide support is
unchanged up to the sale of Turkland, or if the sale fails to be
completed.
The banks' senior unsecured debt ratings, where relevant, are
sensitive to changes in their IDRs.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SUBORDINATED DEBT RATINGS (QNBF, Garanti BBVA, TEB, Kuveyt Turk,
Akbank, Isbank, YKB, Seker, Odea, Fiba and Vakif)
The subordinated notes' ratings of foreign-owned QNBF, Garanti
BBVA, TEB and Kuveyt Turk (issued through its SPV KT21 T2 Sukuk)
have been upgraded to 'B-' from 'CCC+' following the one-notch
upgrade of their LTFC IDR anchor ratings. The notching for the
subordinated notes includes one notch for loss severity and zero
notches for non-performance risk (relative to the banks' anchor
ratings). The one notch, rather than default two notches, for loss
severity reflects its view that institutional support (as reflected
in the banks' LTFC IDRs) helps mitigate losses and incorporates the
fact that the banks' LTFC IDRs are already capped at 'B' by its
view of government intervention risks.
The 'CCC+' subordinated notes' ratings of Akbank, Isbank and YKB
have been placed on RWP, mirroring the RWP on their VRs. This
follows a change to a 'b' VR anchor rating from a 'B' LTFC IDR
anchor rating in all cases (in line with Fitch criteria's baseline
approach), given that the three banks' VRs and IDRs are now
equalised following the upgrade of their LTFC IDRs to 'B'. The
subordinated notes' ratings are notched twice from their VR anchor
ratings for loss severity, reflecting its expectation of poor
recoveries in case of default.
The subordinated notes' ratings of Vakifbank have been upgraded to
'CCC+' from 'CCC' following the upgrade of the bank's VR anchor
rating.
The 'CCC' subordinated debt ratings of Seker, Odea and Fiba, have
been affirmed reflecting the affirmation of their VR anchor
ratings.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
SUBORDINATED DEBT RATINGS (Garanti BBVA, Akbank, Isbank, YKB, QNBF,
TEB, Kuveyt Turk, Odea, Seker, Fiba)
Banks' subordinated debt ratings, where relevant, are sensitive to
a change of their respective anchor ratings. They are also
sensitive to a revision in Fitch's assessment of potential loss
severity in case of non-performance.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Ziraat Katilim's IDRs, driven by its SSR, are equalised with those
of its parent, Ziraat, reflecting the bank's strategic importance
and role as a core subsidiary of the group given its Islamic bank
status, and have been upgraded to 'B' (LTFC IDR) and 'B+' (LTLC
IDR). The Positive Outlook mirrors that on its parent.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Ziraat Katilim's ratings are sensitive to a change in its parent's
rating or propensity to provide support. Ziraat Katilim's VR is
sensitive to a multi-notch downgrade of the operating environment,
and could also be downgraded in case of a material deterioration in
the bank's FC liquidity and core capitalisation buffers,
potentially due to a weakening in financial performance and asset
quality, in turn leading to a material weakening of its business
profile.
Further improvement in the operating environment could result in an
upgrade of Ziraat Katilim's VR, particularly if combined with a
reduction in risk appetite and a strengthening in capitalisation,
earnings and business profile.
VR ADJUSTMENTS
The operating-environment score of 'b' for Turkish banks is below
the 'bb' category implied score due to the following adjustment
reasons: macroeconomic volatility (negative), which reflects
heightened market volatility, high dollarization and high risk of
FX movements in Turkiye, and sovereign rating (negative).
The business profile scores of 'b' for Akbank, Ziraat, Garanti
BBVA, Isbank, Vakif, YKB, QNB Finansbank and Denizbank are below
the 'bb' category implied scores, due to the following adjustment
reason: business model (negative). This reflects the banks'
business model concentration on the high-risk Turkish market.
Kuveyt Turk's earnings and profitability score of 'b' is below the
category-implied score of 'bb', due to the following adjustment
reason: risk-weight calculation (negative).
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
State-owned banks have ratings linked to the Turkish sovereign
rating.
Turkish foreign-owned banks have ratings linked to their respective
parent banks' ratings.
TSKB has ratings linked to the Turkish sovereign rating and
Isbank.
Ziraat Katilim's ratings are driven by support from Ziraat.
ESG CONSIDERATIONS
All Turkish Banks (Excluding Turk Eximbank, TKYB and TSKB)
The ESG Relevance Score for Management Strategy of '4' reflects an
increased regulatory burden on all Turkish banks. Management
ability across the sector to determine their own strategy and price
risk is constrained by increased regulatory interventions and also
by the operational challenges of implementing regulations at the
bank level. This has a moderately negative impact on banks' credit
profiles and is relevant to banks' rating in combination with other
factors.
State-owned Turkish banks
In addition, the state-owned commercial banks - Ziraat, Vakif,
Emlak Katilim, Vakif Katilim and Ziraat Katilim - have ESG
Relevance Scores of '4' for Governance Structure due to potential
government influence over their boards' effectiveness and
management strategy in the challenging Turkish operating
environment, which has a negative impact on the credit profile, and
is relevant to the ratings in conjunction with other factors.
Halk has an ESG Relevance Score of '5' for Governance Structure,
reflecting the elevated legal risk of a large fine, which drives
the RWN on the bank. It also considers potential government
influence over the board's effectiveness in the challenging Turkish
operating environment. Halk has an ESG Relevance Score of '4' for
Management Strategy due to potential government influence over its
management strategy in the challenging Turkish operating
environment, which has a negative impact on the credit profile, and
is relevant to the ratings in conjunction with other factors.
Islamic Banks (Emlak Katilim, Vakif Katilim, Kuveyt Turk, TFKB,
Ziraat Katilim and Albaraka)
Islamic banks' ESG Relevance Score of '4' for Governance Structure
reflects their Islamic banking nature where their operations and
activities need to comply with sharia principles and rules, which
entails additional costs, processes, disclosures, regulations,
reporting and sharia audit. This has a negative impact on their
credit profiles and is relevant to the ratings in conjunction with
other factors.
Islamic banks have an ESG Relevance Score of '3' for Exposure to
Social Impacts, above sector guidance for an ESG Relevance Score of
'2' for comparable conventional banks, which reflects that Islamic
banks have certain sharia limitations embedded in their operations
and obligations, although this only has a minimal credit impact on
Islamic banks.
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.
The Entities involved are:
- Turk Ekonomi Bankasi A.S.
- KT21 T2 Company Limited
- Turkiye Emlak Katilim Bankasi A.S.
- Burgan Bank A.S.
- Turkiye Sinai Kalkinma Bankasi A.S.
- Denizbank A.S.
- ING Bank A.S.
- Turkiye Halk Bankasi A.S.
- Arap Turk Bankasi A.S.
- Alternatifbank A.S.
- AKBANK T.A.S.
- Turkiye Is Bankasi A.S.
- Turkiye Finans Katilim Bankasi A.S.
- Turkland Bank A.S.
- Vakif Katilim Bankasi A.S.
- Albaraka Turk Katilim Bankasi A.S.
- Kuveyt Turk Katilim Bankasi A.S
- Sekerbank T.A.S.
- Turkiye Kalkinma ve Yatirim Bankasi A.S.
- QNB Finansbank Anonim Sirketi
- Turkiye Garanti Bankasi A.S.
- Anadolubank A.S.
- Turkiye Cumhuriyeti Ziraat Bankasi Anonim Sirketi
- Turkiye Vakiflar Bankasi T.A.O.
- Ziraat Katilim Varlik Kiralama A.S.
- Yapi ve Kredi Bankasi A.S.
- Turkiye Ihracat Kredi Bankasi A.S.
- Ziraat Katilim Bankasi A.S.
- Fibabanka Anonim Sirketi
- Odea Bank A.S.
A list of the Affected Ratings is available at:
https://www.fitchratings.com/research/banks/fitch-upgrades-18-turkish-banks-places-5-vrs-on-rating-watch-positive-on-sovereign-upgrade-15-03-2024
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U N I T E D K I N G D O M
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BRITISH TELECOMMUNICATIONS: Moody's Rates New Hybrid Notes 'Ba1'
----------------------------------------------------------------
Moody's Ratings has assigned a Ba1 backed long-term rating to the
proposed subordinated EUR-denominated capital securities due 2054
(the hybrid securities) to be issued by British Telecommunications
Plc (BT or the company, a subsidiary of BT Group Plc) under its
EMTN Program. The outlook is stable.
"The Ba1 rating assigned to the hybrid debt is two notches below
BT's issuer and senior unsecured ratings of Baa2. This reflects the
instruments' deeply subordinated position in relation to the
existing unsecured obligations in the company's capital structure"
says Luigi Bucci, a Moody's AVP-Analyst and lead analyst for BT.
RATINGS RATIONALE
The proposed hybrid securities, which will be guaranteed by BT
Group Plc on a subordinated basis, are long-dated with a 30.5-year
maturity and they do not present any cross-default provisions. The
issuer can also opt to defer settlement of interest on the hybrid
securities on a cumulative and compounding basis. The coupon skip
option will be available for a period of maximum five years. The
rating agency notes that the interest on the proposed hybrid
securities will step-up by 25 basis points (bps) in October 2034,
at least 10 years after the issuance, and an additional 75 bps in
October 2049, 20 years after the first reset date.
The hybrid securities are deeply subordinated obligations ranking
senior only to common shares, pari passu with preference shares,
and junior to all senior and subordinated debt. They thus qualify
for "basket M", i.e. 50% equity treatment, for the purpose of
calculating Moody's credit ratios.
The hybrid securities' rating is positioned relative to BT's senior
unsecured and issuer ratings. Thus a change in the company's issuer
and senior unsecured ratings or a re-evaluation of the relative
notching could impact the hybrid securities' rating.
RATIONALE FOR STABLE OUTLOOK
The stable rating outlook reflects Moody's expectation of a
moderate improvement in the company's operating performance in
fiscal 2024-25, supported by price increases and the increasing
takeup of fibre products at Openreach despite continued pressures
in the Business segment. Such an improvement should keep BT's
Moody's-adjusted leverage below 3.5x and Moody's-adjusted retained
cash flow (RCF)/net debt well above 18%, both on a sustained
basis.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade BT's ratings if its: (1) underlying operating
performance and cash flow generation substantially improve, with
growing revenue and stronger key performance indicator (KPI) trends
leading to a sustainable EBITDA growth trajectory, coupled with
visibility into capital spending requirements; (2) Moody's-adjusted
RCF/net debt remains above 22% on a sustained basis; (3)
Moody's-adjusted debt/EBITDA falls below 2.8x on a sustained
basis.
Downward pressure on the ratings could arise if BT's: (1) operating
performance weakens compared with Moody's current expectations, or
the risks arising from the pension deficit significantly increase
as a result of a widening in the deficit; (2) Moody's-adjusted
RCF/net debt remains consistently below 18%; (3) Moody's-adjusted
debt/EBITDA exceeds 3.5x on a sustained basis.
The principal methodology used in this rating was
Telecommunications Service Providers published in November 2023.
COMPANY PROFILE
BT Group Plc is a leading UK telecommunications and network
operator and a leading provider of global communications services
and solutions, serving customers in roughly 180 countries. Over
fiscal 2023 (ending March), the company generated revenues and
EBITDA -as reported- of GBP20.7 billion and GBP7.9 billion,
respectively.
BT GROUP: S&P Rates Junior Subordinated Hybrid Securities 'BB+'
---------------------------------------------------------------
S&P Global Ratings assigned its 'BB+' issue rating to the junior
subordinated hybrid securities to be issued by British
Telecommunications PLC, wholly owned subsidiary of U.K.-based
telecom operator BT Group PLC (BT; BBB/Stable/A-2).
British Telecommunications PLC, a wholly owned subsidiary of BT
Group PLC, plans to issue new junior subordinated securities of a
benchmark size.
The group intends to use the proceeds to prefund the refinancing of
the outstanding EUR500 million subordinated securities callable in
May 2025 and for general corporate purposes.
S&P said, "The rating reflects our notching for subordination and
optional interest deferability. We understand that BT intends to
maintain or replace these securities as a long-term form of capital
on its balance sheet. We also assume that BT will use the proceeds
from the new issuance primarily to prefund the refinancing of the
outstanding EUR500 million hybrid securities callable in May 2025.
We estimate that even if the final issue amount exceeds the hybrid
to be replaced, following the transaction hybrid instruments will
not exceed about 6.5% of BT's adjusted capitalization, well below
the 15% threshold under our criteria.
"We assess the proposed securities as having intermediate equity
content until the first reset date, and expect to reassess the
EUR500 million existing hybrids callable in May 2025 as having
minimal equity content.
"We consider the proposed securities as having intermediate equity
content because they are subordinated to all BT's senior debt
obligations, cannot be called for at least 5.25 years, and are not
subject to features that could discourage or materially delay
deferral."
S&P derives its 'BB+' rating on the securities by notching down
from our 'BBB' rating on BT. The two-notch difference reflects its
deducting:
-- One notch for subordination because S&P's long-term rating on
BT is 'BBB-' or above; and
-- An additional notch for payment flexibility, because the option
to defer interest stands with the issuer.
S&P said, "The notching indicates that we consider the issuer
relatively unlikely to defer interest. Should our view change, we
may increase the number of notches we deduct to derive the issue
rating.
"In addition, given our view of the intermediate equity content of
the proposed securities, we allocate 50% of the related payments on
the security as a fixed charge and 50% as equivalent to a common
dividend. The 50% treatment of principal and accrued interest also
applies to our adjustment of debt."
Features Of The Hybrid Instrument
S&P said, "We understand that the proposed security and coupons are
intended to constitute the issuer's direct, unsecured, and deeply
subordinated obligations, ranking senior only to its common
shares.
"We understand that the first interest reset date will be in
October 2029, at least 5.5 years from the issue date. BT can redeem
the security for cash up to 90 days before the first reset date,
and on every coupon payment date thereafter. In addition, the
company can call the instrument prior to July 2029 through a
make-whole redemption option. We understand that BT does not intend
to redeem the instrument before the redemption window of the first
reset date, and we do not consider that this type of make-whole
clause creates an expectation that the issue will be redeemed
before then. Accordingly, we do not view it as a call feature in
our hybrid analysis, even if it is referred to as a make-whole
option clause in the hybrid documentation.
The securities mature 30.5 years after the issue date, but can be
called at any time for a tax, rating, accounting, or
change-of-control event. BT can also call the securities if a
clean-up event occurs. If any of these events occurs, BT intends to
replace the hybrid, but is not obliged to do so. In our view, this
statement of intent currently mitigates the issuer's ability to
call or repurchase the security."
The interest deferral doesn't constitute an event of default and
there are no cross defaults with the senior debt instruments. In
addition, the hybrid's terms allow BT to choose to defer interest
payment on the proposed securities for up to five years--it has no
obligation to pay accrued interest on an interest payment date.
That said, if BT declares or pays an equity dividend or interest on
equally ranking securities, or if it redeems or repurchases shares
or equally ranking securities, it is required to settle any
outstanding deferred interest payment and the interest accrued
thereafter in cash.
The interest on the proposed securities will increase by 25 basis
points (bps) in October 2034, five years after the first reset
date, and a further 75 bps in October 2049, 20 years after its
first reset date. S&P said, "We consider the date of the second
step-up as the instrument's effective maturity date, because we
view the cumulative increase in interest of 100 bps to be material
under our criteria, providing BT with an incentive to redeem the
instrument in October 2049. Therefore, we are unlikely to recognize
the instrument as having intermediate equity content after its
first reset date in October 2029, because its economic maturity
then falls below 20 years."
S&P said, "Until its first reset date, we expect to classify the
instrument as having intermediate equity content. We could revise
our assessment if we think that the issuer is likely to call the
instrument because it is about to lose the intermediate equity
content."
CURZON MORTGAGES: Fitch Affirms B+sf Rating, Alters Outlook to Neg.
-------------------------------------------------------------------
Fitch Ratings has revised Curzon Mortgages Plc class C, D, E, F and
G notes Outlook to Negative from Stable. All ratings have been
affirmed.
Entity/Debt Rating Prior
----------- ------ -----
Curzon Mortgages PLC
A1 XS2607046054 LT AAAsf Affirmed AAAsf
A2 XS2603650370 LT AAAsf Affirmed AAAsf
B XS2603650537 LT AAsf Affirmed AAsf
C XS2603650883 LT Asf Affirmed Asf
D XS2603651931 LT BBB+sf Affirmed BBB+sf
E XS2603652400 LT BBBsf Affirmed BBBsf
F XS2603652582 LT BB+sf Affirmed BB+sf
G XS2603653556 LT B+sf Affirmed B+sf
X XS2603655098 LT CCCsf Affirmed CCCsf
TRANSACTION SUMMARY
The transaction is a securitisation of UK owner-occupied (OO) loans
originated by Northern Rock Plc, mainly between 2006 and 2008. The
loans were previously securitised under the Chester B1 Plc
transaction.
KEY RATING DRIVERS
Deteriorating Asset Performance: The proportion of loans in arrears
for more than one month have increased to 23.5% from 17.3% since
the transaction's closing April 2023. So far deterioration in asset
performance has been partially offset by the build-up of credit
enhancement (CE). Should asset performance continue to deteriorate
with rising arrears and consequently increases in repossessions,
this could have a negative impact on model-implied ratings (MIR)
and lead to rating downgrades.
Increased CE: CE has continued to build due to the sequential
amortisation of the notes and the transaction's static general
reserve fund. CE for the most senior notes has increased to 23.4%
currently from 17.8% at closing. The build-up of CE supports the
affirmations to the notes.
Increase in Restructured Loans: Fitch received loan-level data from
the servicer, which contained a material increase in restructured
loans. This was due to a coding update that allowed the servicer to
capture restructuring arrangements that occurred before 2012. As
per Fitch's criteria, loans that have been restructured are subject
to a multiplicative increase to the foreclosure frequency (FF) or
an arrears floor, depending on when the loan was last in arrears.
This had a negative impact on the asset-level model outputs for
this transaction.
Higher-Than-Expected Loss Severity: The transaction recorded a
lifetime loss severity of 28.1% as at 31 January 2024, higher than
that projected by Fitch's Resiglobal Model: UK in its base case.
While the high loss severity is likely to be due in part to
negative selection of those properties being taken into possession,
persistent underperformance may lead to losses beyond the amount
that the transaction can recover through excess spread and,
potentially, rating downgrades. This supports the rationale for
constraining the rating of the class G notes at one notch below
their MIR and is underscored by the Negative Outlook.
Strong Excess Spread: The majority of loans in the pool pay an
interest rate based on a standard variable rate (SVR) set by the
legal title holder. This has allowed the portfolio to generate a
sizeable amount of excess spread since closing, as loans paying an
SVR typically produce higher revenue than loans paying a different
interest-rate type, for example those paying a rate linked to the
Bank of England base rate. This supports the affirmations to the
notes' ratings through the principal deficiency ledger mechanism,
which allows principal losses to be recovered from available excess
revenue.
Criteria Variation Removed: Fitch has removed a variation to its UK
RMBS Criteria when it assigned final ratings for the class G notes
of the transaction. The variation was due to the rating exceeding
the one-notch flexibility limit from the MIR, as Fitch based its
analysis on scenarios that included lower weighted-average recovery
rates (WARR) than its proprietary asset-model implied. This
approach reflected the high loss severity levels observed in the
refinanced Chester B1 Plc transaction.
For existing ratings, where updated analysis results in a MIR above
the current rating, Fitch's criteria allow for the current rating
to be affirmed if it expects the MIR to be lower in future model
updates. This means the Criteria Variation is no longer applicable,
and allows for the class G notes to be affirmed at one notch below
its MIR.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The transaction's 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.
In addition, unanticipated declines in recoveries could 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 found that a 15% increase in the weighted average
foreclosure frequency (WAFF) and a 15% decrease in the weighted
average recovery rate (WARR) indicate a three-notch downgrade to
the class A1, A2 and G notes, a four-notch downgrade to the class B
and D notes, a five-notch downgrade to the class C and F notes, and
a six-notch downgrade to the class E notes.
Factors 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. Fitch tested an additional rating sensitivity scenario by
applying a 15% decrease in the WAFF and a 15% increase in the WARR.
This would imply a one-notch upgrade to the class B notes, a
two-notch upgrade to the class C notes, a three-notch upgrade to
the class D, E and F notes, and a six-notch upgrade to the class G
notes.
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
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
EM MIDCO 2: Moody's Affirms 'B3' CFR & Alters Outlook to Positive
-----------------------------------------------------------------
Moody's Ratings affirmed the B3 corporate family rating and B3-PD
probability of default rating of EM Midco 2 Limited (Element
Materials Technology, Element or the company), a UK headquartered
materials and product qualification testing company. Concurrently,
Moody's downgraded to B3 from B2 the rating of the backed senior
secured bank credit facilities borrowed by Element Materials
Technology Grp US Hld Inc and EM Bidco Limited. The outlook of all
entities has been changed to positive from stable.
The rating action reflects:
-- The additional $570 million equity from its majority
shareholder, Temasek Holdings (Private) Limited (Temasek, Aaa
stable), which reinforces the strong shareholder support and its
long term commitment to the business, this after the $242 million
received at the end of 2023. Element's capital structure will be
reset, with the repayment of the more expensive GBP288 million
($370 million) second lien debt and the replenishment of its backed
secured capex / acquisition facility.
-- The expected improvement in financial performance in 2024,
supported by NTS's turnaround being complete, revenue growth and
management's focus on cost cutting and margin improvement. Moody's
is forecasting high single digit growth in pro forma adjusted
EBITDA in 2024. This is after the weaker 2023 performance,
primarily driven by pressures from the macroeconomic environment
and the delay in integrating its US acquisition, NTS.
-- There will be a meaningful decrease in leverage post the equity
contribution, which will be in the form of Convertible Perpetual
Notes and sit outside of the banking restricted group. Although
proforma leverage for 2023 is still high with Moody's-adjusted debt
/ EBITDA of around 7.9x, based on preliminary 2023 financials, and
before exceptional acquisition costs, Moody's expects leverage in
2024 to decrease towards 6.5x, as EBITDA improves. The agency
expects interest cover, as measured by Moody's adjusted EBITA /
interest expense, to improve towards 1.5x and be free cash flow
positive in the next 12-18 months.
-- The repayment of the second lien debt, whilst credit positive
given it reduces gross debt and was the more expensive debt in the
structure, results in the alignment of the rating for the backed
senior secured bank credit facilities with the corporate family
rating, reflecting the all senior secured pari passu capital
structure.
RATINGS RATIONALE
Element's B3 CFR continues to reflect (1) the group's established
position in the Testing, Inspection and Certification (TIC) sector,
which is supported by high barriers to entry given the technically
demanding testing market and significant switching costs for
customers; (2) the critical and non-discretionary nature of the
group's testing services for its customers, largely in resilient
industries with zero or low tolerance for failure and; (3)
Element's strengthened business profile through various
acquisitions with significantly improved diversification towards
less cyclical, new technology markets, such as life sciences, with
good growth prospects. The rating is also supported by the strong
growth seen in the Aerospace and Defence business, which is
expected to continue.
Conversely, the CFR is constrained by (1) Element's high financial
leverage; (2) weak interest cover and limited free cash flow
generation, expected to improve on the back of the cost actions
taken by management and as one-off costs fade away; and (3)
Element's exposure to cyclical end-markets, such as commercial
aerospace and energy, which still accounted for around one quarter
of 2023 revenues (pro forma for acquisitions).
ENVIRONMENTAL, SOCIAL & GOVERNANCE CONSIDERATIONS
Element's ESG Credit Impact Score is CIS-4 and is primarily driven
by governance risk. This is due to its concentrated ownership
structure with Temasek controlling over 80% of the company's
shares. It also reflects the historically very aggressive financial
policy with debt-funded acquisitions that have led to very high
financial leverage. Furthermore, the presence of a PIK note as part
of the capital structure increases structural complexity and
highlights the group's tolerance for high leverage. Balancing this
is the strong support shown by its major shareholder providing new
equity.
LIQUIDITY
Moody's considers Element's liquidity to be adequate. On December
31, 2023, the company had $174 million of cash on balance sheet. It
had $133 million available under its committed $200 million backed
senior secured first lien revolving credit facility (RCF) and $200
million backed senior secured acquisition / capex facility, which
will be fully undrawn after the new equity contribution. Moody's,
however, expects the company to draw on its RCF to meet its cash
flow requirements. The RCF is subject to a springing first lien net
leverage covenant (9.1x senior secured leverage ratio), when
drawings exceed 40% and currently has around 30% headroom. The
company has no imminent liquidity concerns. The next maturity is in
December 2028 for the RCF and acquisition / capex facility,
followed by June 2029 for the first lien term loans.
STRUCTURAL CONSIDERATIONS
The backed senior secured first-lien term loans, RCF and
acquisition / capex facility, all rank pari passu. These facilities
benefit from first lien guarantees from all material subsidiaries
covering at least 80% of the consolidated EBITDA. They are secured
by a first-lien pledge over substantially all tangible and
intangible assets of the borrowers and guarantors in the US and by
shares, bank accounts, intra-group receivables and a floating
charge in England & Wales. The B3 instrument rating of the first
lien facilities is in line with the B3 CFR given the planned
repayment of the second lien term loan facility.
RATING OUTLOOK
The positive outlook reflects Moody's expectation that the company
will grow its EBITDA and continue to de-lever below 6.5x on a
Moody's adjusted and for Moody's adjusted EBITA/ interest expense
to increase towards 1.5x over the next 12-18 months. The outlook
further assumes that liquidity will remain adequate and that any
larger acquisitions will not lead to material re-leveraging. The
outlook also reflects strong shareholder commitments and objectives
to de-lever.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure could occur if Moody's-adjusted debt/EBITDA
decreases towards 6.5x, Moody's-adjusted free cash flow/debt is
positive, interest coverage as measured by Moody's adjusted EBITA/
interest expense increases towards 1.5x and liquidity remains
adequate.
Downward pressure on the rating could develop if Element is unable
to grow its EBITDA, resulting in continued high leverage; free cash
flow remains negative for a sustained period, interest coverage as
measured by Moody's adjusted EBITA/ interest expense remains below
1.0x or liquidity weakens.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and
Consumer Services published in November 2021.
CORPORATE PROFILE
Headquartered in the UK, Element is an independent provider of
materials and product qualification testing, offering a full suite
of laboratory-based services. The company specialises in the
aerospace, space & defence, connected technology, life sciences,
mobility, energy & transition and built environment sectors. It
operates mainly in the US and Europe with a growing presence in
Asia. Its services cover technically demanding testing for a broad
range of advanced materials, components, products and systems. The
testing is to ensure compliance with safety, performance and
quality standards imposed by customers, accreditation bodies and
regulatory authorities.
In 2022 Temasek, a Singapore-based investment company became the
majority owner of the group.
FOURPURE: Applies for CVA to Avert Liquidation
----------------------------------------------
James Beeson at The Grocer reports that London craft brewer
Fourpure has applied for a Company Voluntary Arrangement (CVA) to
continue trading as it struggles to meet existing obligations to
creditors.
According to The Grocer, the brewery, owned by In Good Company
Brewing, has hired FRP Advisory as an insolvency practitioner. FRP
made the CVA application on its behalf on March 26, The Grocer
relates.
Approached by The Grocer, Steve Cox, CEO and co-owner of In Good
Company insisted the CVA application was "a short term move to
future proof the business", The Grocer notes.
He added In Good Company still had "a huge amount of belief in the
Fourpure brand, the people behind it and the fantastic beers
Fourpure has been making for over a decade".
"This move is about taking decisive action sooner rather than
later, and facing issues head on to protect the business for the
future," The Grocer quotes Mr. Cox as saying. "We are working hard
to ensure continuity of supply during this time, and that this does
not impact customer agreements. We want to ensure that Fourpure
continues forward with as little disruption as possible."
A CVA is an insolvency process which allows for unmanageable
company debts to be paid back over a period of time, typically
three to five years.
If its application is approved, FRP will work out how much of its
debts Fourpure can afford to repay before putting the arrangement
to creditors for a vote, The Grocer states.
Unless three-quarters of creditors (by debt value) agree to the
arrangement, however, the brewery could face voluntary liquidation,
The Grocer notes.
No further detail on the extent of Fourpure's debts was forthcoming
from In Good Company. The company's accounts for the year ended
December 31, 2022, are currently overdue, The Grocer relays, citing
Companies House.
GLENALMOND GROUP: Goes Into Administration
------------------------------------------
Business Sale reports that Glenalmond Group Limited, a
manufacturing group based in South Lanarkshire, has fallen into
administration.
Michelle Elliot and Allan Kelly of FRP Advisory were appointed as
joint administrators to the group's two subsidiaries, Valve
Components Limited and International Oilfield Drilling Supplies
Limited, Business Sale relates.
The group provided turnkey production services to the oil and gas,
defence, aerospace and energy sectors, but had been hit by
challenging trading conditions over recent years, as a result of
loss-making contracts, a lack of future orders and an increased
cost base following the COVID-19 pandemic.
According to Business Sale, administrators secured the sale of
group subsidiary IODS Pipe Clad Limited to an unnamed Scottish
manufacturing firm, but the group and its two remaining
subsidiaries have now ceased trading, with administrators seeking
buyers for their assets.
In the year to March 31 2021, Glenalmond Group reported turnover of
GBP17.7 million, down from GBP27.5 million a year earlier, while
its pre-tax losses widened from GBP936,000 to over GBP1.1 million,
Business Sale discloses. At the time, the group's total equity
amounted to GBP5.4 million, Business Sale notes.
GROSVENOR SQUARE 2023-1: S&P Lowers E-Dfrd Notes Rating to 'B+'
---------------------------------------------------------------
S&P Global Ratings lowered its credit ratings on Grosvenor Square
RMBS 2023-1 PLC's class D-Dfrd notes to 'BBB- (sf)' from 'BBB
(sf)', E-Dfrd notes to 'B+ (sf)' from 'BB (sf)', and class F-Dfrd
notes to 'CCC+ (sf)' from 'B (sf)'. We also raised to 'BBB+ (sf)'
from 'BBB (sf)' its rating on the class XS2-Dfrd notes. At the same
time, S&P affirmed its 'AAA (sf)', 'AA- (sf)', 'A (sf)', and 'CCC
(sf)' ratings on the class A, B-Dfrd, C-Dfrd, and G-Dfrd notes,
respectively.
S&P said, "The rating actions reflect our view of the transaction's
performance. The excess spread has accelerated the repayment of
class XS2-Dfrd, which is expected to be repaid this year. The rise
in arrears has been detrimental to the class D-Dfrd, E-Dfrd, and
F-Dfrd notes, and so we lowered our ratings on these classes of
notes.
"Since closing, our weighted-average foreclosure frequency (WAFF)
assumptions increased at all rating levels primarily due to higher
loan-level arrears. This has been partially offset by lower
weighted-average loss severity (WALS) assumptions driven by a
decrease in the current loan-to-value (LTV) ratio."
Portfolio WAFF and WALS
RATING LEVEL WAFF (%) WALS (%) CREDIT COVERAGE (%)
AAA 30.48 32.94 10.04
AA 24.35 25.38 6.18
A 21.10 14.22 3.00
BBB 17.99 8.51 1.53
BB 14.71 5.13 0.75
B 13.97 2.73 0.38
WAFF--Weighted-average foreclosure frequency.
WALS--Weighted-average loss severity.
Loan-level arrears have increased since closing and stand at 13.4%
at the end of November which is above the U.K. buy-to-let (BTL)
index that has reached 5.9%.
The general reserve fund and liquidity reserve fund are both at
target.
S&P said, "Our credit and cash flow results indicate the available
credit enhancement for the class A notes continues to be
commensurate with the assigned 'AAA (sf)' rating. We have therefore
affirmed this rating.
"We affirmed our 'AA- (sf)' and 'A (sf)' ratings on the class
B-Dfrd and C-Dfrd notes, respectively, in line with our sensitivity
runs accounting for higher defaults given the ascending trend in
arrears amid the ongoing cost of living crisis and high interest
rate environment.
"The credit enhancement for the class D-Dfrd and E-Dfrd notes is no
longer commensurate with the current rating levels. We therefore
lowered to 'BBB- (sf)' from 'BBB (sf)' and to 'B+ (sf)' from 'BB
(sf)' our ratings on the class D-Dfrd and E-Dfrd notes,
respectively, following the rise in arrears resulting in
significantly higher WAFF numbers at lower rating levels, as
reflected in our sensitivity runs.
"The credit enhancement for the class F-Dfrd notes is no longer
commensurate with the current rating level. The class F-Dfrd and
G-Dfrd notes did not achieve any rating in our standard or steady
state (actual fees, expected prepayment) cash flow runs. We
therefore lowered to 'CCC+ (sf)' from 'B (sf)' our rating on the
class F-Dfrd notes and affirmed our 'CCC (sf)' rating on the class
G-Dfrd notes as they both rely on favorable economic or financial
conditions to service their debt.
"We raised to 'BBB+ (sf)' from 'BBB (sf)' our rating of the class
XS2-Dfrd notes due to the level of excess spread, material
repayment since closing, and the expectations that the notes will
be repaid within a year. We also considered the lack of
collateralization of the notes, the uncertain macroeconomic
outlook, and deteriorating credit performance.
"There are no counterparty constraints on the notes' ratings in
this transaction. The replacement language in the documentation is
in line with our counterparty criteria."
OPTIONS SKILLS: Goes Into Liquidation, Ceases Operations
--------------------------------------------------------
Nathan Clarke and Benedict Tetzlaff-Deas at Mirror report that a
group of students have said they have been left GBP7,000 in debt
with "nothing to show for it" after a training course provider
suddenly went bust.
Options Skills Ltd, based in Birmingham, went into liquidation this
week without informing any of its students, it has been alleged,
Mirror relates. On its website, the firm describes itself as "one
of the UK's leading trades training providers", delivering
accredited gas, electrical and plumbing courses. But trainees say
they have been left with no money or qualifications after only
being told their course had been cancelled via social media -- and
said there was no official confirmation from the company for days.
According to Mirror, a statement on the group's website published
on March 19 reads: "It is with regret to note that Option Skills
Limited has ceased to trade, this has been caused by circumstances
beyond the Director's control. The Directors have engaged
Insolvency Practitioners from Bebgies Traynor who will be
contacting students and creditors over the next few days as to the
position."
EAL is a specialist skills partner and awarding organisation for
the manufacturing and engineering industries. The group confirmed
the closure of Options Skills Ltd in a statement, and has urged
affected students to fill out an online form, Mirror discloses.
"EAL is aware that the training provider Options Skills Ltd has
recently gone into liquidation and we are urgently assessing the
situation. As an awarding organisation, we have spoken to the
regulator, Ofqual, and will continue to liaise with them," Mirror
quotes the group as saying.
"This is a complex situation, and we will continue to provide
further updates on our social media platforms when we are able. We
understand that this is a very difficult situation for the learners
impacted. Please be assured that EAL, NET and TESP are working
together to support you, and we will communicate updates in
partnership as and when we have them."
STRATTON MORTGAGE 2024-2: S&P Assigns B (sf) Rating to Cl. F Notes
------------------------------------------------------------------
S&P Global Ratings has assigned credit ratings to Stratton Mortgage
Funding 2024-2 PLC's class A, B-Dfrd, C-Dfrd, D-Dfrd, E-Dfrd, and
F-Dfrd notes. At closing, Stratton Mortgage Funding 2024-2 also
issued unrated classes Z, X1, and X2 notes, and RC1 and RC2
certificates.
S&P based its credit analysis on a pool of GBP304.9 million (as of
Feb. 29, 2024). This a refinancing of Stratton Mortgage Funding
2021-1 PLC (Stratton 2021-1). The pool comprises first-ranking
nonconforming, reperforming, owner-occupied, and buy-to-let (BTL)
mortgage loans that were positively selected from "Project Sunbury"
(Sunbury portfolio) or served as risk retention loans in Warwick 1
and Warwick 2, or previously securitized in Leek (Moonraker
portfolio).
BCMGlobal Mortgage Services Ltd. and BCMGlobal ASI Ltd. are the
servicers for the Sunbury portfolio, and Western Mortgage Services
Ltd. is the servicer for the Moonraker portfolio.
S&P said, "We rate the class A notes based on the payment of timely
interest. Interest on the class A notes is equal to the daily
compounded Sterling Overnight Index Average (SONIA) plus a
class-specific margin.
"We treat the class B-Dfrd, C-Dfrd, D-Dfrd, E-Dfrd, and F-Dfrd
notes as deferrable-interest notes in our analysis. Under the
transaction documents, the issuer can defer interest payments on
these notes. Our ratings on these classes of notes address the
ultimate payment of principal and interest. Once the ultimate
interest notes become the most senior, interest payments will be
paid on a timely basis.
"Our ratings reflect our assessment of the transaction's payment
structure, cash flow mechanics, and the results of our cash flow
analysis to assess whether the notes would be repaid under stress
test scenarios. Subordination and excess spread provide credit
enhancement to the class A to F-Dfrd notes, which are senior to the
unrated notes and certificates. The liquidity reserve and general
reserve are in place to provide liquidity support and credit
enhancement to the class A notes."
Ratings
CLASS RATING* CLASS SIZE (GBP MIL.)
A AAA (sf) 226.98
B-Dfrd AA (sf) 19.05
C-Dfrd A (sf) 16.77
D-Dfrd BBB (sf) 13.72
E-Dfrd BB (sf) 7.62
F-Dfrd B (sf) 2.44
Z NR 23.63
X1 NR 2.00
X2 NR 2.00
*S&P's ratings address timely receipt of interest and ultimate
repayment of principal for the class A notes, and the ultimate
payment of interest and principal on the other rated notes.
NR--Not rated.
THAMES WATER: Holds Crunch Meeting, Seeks GBP750MM Lifeline
-----------------------------------------------------------
Luke Barr at The Telegraph reports that Thames Water held a crunch
board meeting on March 27 amid a scramble to secure hundreds of
millions of pounds from shareholders.
According to The Telegraph, directors of the troubled supplier are
racing to finalise a GBP750 million lifeline from investors, with
the threat of special administration looming as Thames reels from
vast debts and poor performance.
Industry sources have signalled that this payment could be
significantly reduced by shareholders as the business braces for
major fines from regulator Ofwat, The Telegraph notes.
Without the extra money from investors, who include Canadian
pension fund Omers and the Universities Superannuation Scheme,
Thames would be at risk of relying on a taxpayer-backed bailout,
The Telegraph states. The business needs billions of pounds to
survive, according to The Telegraph.
Thames announced last year that investors were willing to inject
GBP3.25 billion into the business, with GBP750 million expected in
2024, The Telegraph recounts.
However, this was dependent on certain milestones being met,
including Ofwat allowing a significant increase to household water
bills, The Telegraph notes.
Thames, The Telegraph says, has borrowings of nearly GBP19
billion.
According to The Telegraph, if the company is put into special
administration, it is estimated that as much as GBP5 billion of
financial support would be needed to keep customers connected.
Thames said last October that shareholders were prepared to provide
GBP750 million "subject to satisfaction of certain conditions,
including the preparation of a business plan that underpins a more
focused turnaround that delivers targeted performance improvements
for customers, the environment and other stakeholders over the next
three years and is supported by appropriate regulatory
arrangements", The Telegraph relays.
In a prospectus published last year, the company said there was no
certainty the money would be received in 2024, The Telegraph
recounts. Government officials have been working on contingency
plans for the rescue of Thames in recent months, under the code
name "Project Timber", The Telegraph discloses.
There is concern that Ofwat risks tipping the business over if it
levies fines for poor performance, The Telegraph notes.
VICTORIA PLC: Moody's Affirms 'B2' CFR, Alters Outlook to Negative
------------------------------------------------------------------
Moody's Ratings has affirmed the B2 corporate family rating, B2-PD
probability of default rating and B2 rating of EUR250 million and
EUR500 million backed senior secured notes issued by Victoria plc,
a leading supplier of flooring products. The outlook has been
changed to negative from stable.
RATINGS RATIONALE
The change in outlook to negative from stable follows Victoria's
recent announcement that company-reported underlying EBITDA for the
fiscal year ending in March 2024 will be around GBP160 million,
with Moody's estimating that Moody's-adjusted leverage will reach
around 7x at the end of the fiscal year. The change in outlook also
reflects Moody's expectations that demand for flooring products,
especially within the EU and UK which are Victoria's largest
markets, will remain subdued in fiscal 2025 as the property market
and refurbishment activity is negatively impacted by high interest
rates. Accordingly, the rating agency only expects moderate EBITDA
growth resulting in Moody's-adjusted leverage around 6.0x at the
end of fiscal 2025.
Governance considerations were a key driver of the rating actions.
The current elevated leverage and the decision to pursue share
repurchases at this point of the economic cycle has been considered
in the rating action.
Victoria has recently announced that its Board now expects
company-reported underlying EBITDA for fiscal 2024 to be GBP160
million as a result of continued soft consumer demand in Europe,
subdued conditions in the UK and Australia and increased costs due
to labour inflation and accelerated reorganisation and integration
initiatives. Together with exceptional costs of approximately GBP15
million, Moody's estimates that Moody's-adjusted leverage will
increase to around 7x at the end of fiscal 2024 against Moody's
previous forecast of approximately 5.5x.
For fiscal 2025, Moody's expects the macroeconomic environment to
remain challenging, impacting not only the soft flooring segment
but the ceramics operations as well due to its higher price point
and reduced refurbishing activity. However, the rating agency
expects that the reorganisational initiatives pursued during fiscal
2023 and fiscal 2024 will have a positive impact in Victoria's
profitability margins, resulting in higher operating profit despite
flat revenue. Therefore, Moody's forecasts that Moody's-adjusted
leverage should reduce to levels closer to 6.0x in fiscal 2025.
Additionally, the rating agency also expects that free cash flow
generation will be positive in fiscal 2025, as Victoria reduces its
working capital by keeping lower inventory levels than in recent
years.
Victoria's B2 CFR is also constrained by the company's (1) degree
of integration risk following a significant number of acquisitions,
mitigated by positive track record on the past acquisitions; (2)
activities in mature markets with limited growth and competitive
pressures; (3) sale of consumer discretionary items with exposure
to the economic cycle; and (4) raw material price and currency
exposures, partly mitigated by hedging.
On the other hand, the rating is supported by (1) leading positions
within the fragmented European soft flooring and ceramic tiles
markets; (2) focus on independent retail channels with greater
customer diversity and pricing power; (3) low exposure to the new
construction segment; and (4) flexible cost structure.
ESG CONSIDERATIONS
Victoria's CIS-3 score indicates that ESG considerations have a
limited impact on the current credit rating with potential for
greater negative impact over time. This mostly reflects a degree of
concentrated ownership of the business, the tolerance for high
leverage, as well as the recent decision to pursue share
repurchases at this point of the economic cycle and the qualified
audit opinion in the company's 2023 results due to issues at a
subsidiary level which result in an G-4 IPS (Issuer Profile Score).
Victoria's business is also energy intensive and relies on natural
resources. These factors are mitigated by the fact that the company
is AIM listed and subject to the QCA Corporate Governance Code.
Moody's also notes that the company has recently strengthened its
financial policy with a net leverage target of 2.25x
LIQUIDITY
The company's liquidity is good with GBP93 million of cash on the
balance sheet as of end September 2023, as well as approximately
GBP117 million available under the GBP150 million revolving credit
facility (RCF) due February 2026 and access to above GBP50 million
in undrawn unsecured local credit facilities. By the end of fiscal
2024, Moody's expect liquidity to be strengthened by proceeds of
EUR31 million (GBP28 million) from the disposal of surplus assets,
and for the outstanding RCF drawings to be largely repaid. Moody's
also expect free cash flow to be marginally positive in fiscal
2025. The RCF is subject to a net leverage springing covenant that
is tested when the RCF is over 40% drawn.
STRUCTURAL CONSIDERATIONS
The company's backed senior secured notes are rated B2, in line
with the B2 CFR. The GBP150 million super senior RCF ranks ahead of
the backed senior secured notes. However, the notes are rated in
line with the CFR because the RCF is relatively small compared to
the notes. There is also other debt within the company's financial
structure, largely relating to unsecured local facilities and
leases. Security largely comprises share pledges and a debenture
over assets in the UK and Australia, and guarantees are provided
from material companies representing at least 80% of turnover,
EBITDA and gross assets.
RATING OUTLOOK
The negative outlook reflects Victoria's current weak position in
the B2 rating category but also Moody's expectations that
Moody's-adjusted leverage will improve towards 6.0x at the end of
fiscal 2025 and further towards 5x in fiscal 2026 as a result of
restructuring measures and despite the current challenging
operating environment. The outlook also reflects the company's
focus on adhering to its financial policy of reducing net reported
leverage to around 2.25x. Any underperformance versus Moody's
current base case could result in a ratings downgrade.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While unlikely over the next 12-18 months, the ratings could be
upgraded if Victoria's operating performance and profitability
improves such that (i) Moody's-adjusted leverage is sustainably
below 5x, (ii) Moody's-adjusted EBIT / interest is at least 2.25x,
and (iii) the company maintains good liquidity.
The ratings could be downgraded if (i) Moody's-adjusted leverage is
sustained above 6x, (ii) Moody's-adjusted EBIT/Interest is
sustainably below 1.5x, (iii) free cash flow / debt reduces towards
zero for a prolonged period, or (iv) liquidity concerns arise.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Consumer
Durables published in September 2021.
COMPANY PROFILE
Victoria plc was founded in 1895 in the United Kingdom, and is an
international designer, manufacturer and distributor of flooring
products across carpets, ceramic tiles, underlay, luxury vinyl
tile, artificial grass and flooring accessories. Victoria is listed
on AIM in London with a market capitalisation of approximately
GBP295 million as of time of this publication. The company benefits
from good geographic diversification, with more than 70% of its
EBITDA generated from outside the UK. For the financial year ending
in March 2023, the company generated GBP1,480 million of sales and
GBP196 million of reported underlying EBITDA.
*********
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