/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/240410.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 Wednesday, April 10, 2024, Vol. 25, No. 73 Headlines F I N L A N D MEHILAINEN YHTYMA: Fitch Affirms 'B' LongTerm IDR, Outlook Stable F R A N C E ATOS SE: To Receive EUR450MM in Financing Amid Creditor Talks CGG SA: S&P Raises Rating to 'B-', Outlook Stable FINANCIERE GROUPE: S&P Affirms 'B' Long-Term ICR, Outlook Stable GETLINK SE: Fitch Affirms 'BB' Bond Rating, Alters Outlook to Pos. HOLDING D'INFRASTRUCTURES: Fitch Lowers LongTerm IDR to 'BB+' LABORATOIRE EIMER: Moody's Cuts CFR to B3, Outlook Remains Stable G E O R G I A BANK OF GEORGIA: Moody's Rates New $300MM AT1 Notes 'B2(hyb)' G E R M A N Y GRUNENTHAL PHARMA: Moody's Alters Outlook on 'B1' CFR to Stable I R E L A N D CROSS OCEAN IX: S&P Assigns B- (sf) Rating to Class F Notes CTS GROUP: Bought Out of Administration by Ekco, 140 Jobs Saved HARVEST CLO XX: Moody's Affirms B2 Rating on EUR12MM Class F Notes ROCKFORD TOWER 2018-1: S&P Assigns B- (sf) Rating to F-R Notes SIGNAL HARMONIC II: S&P Assigns B- (sf) Rating to Class F Notes L U X E M B O U R G ARDAGH GROUP: S&P Cuts ICR to 'B-' on Prolonged Operating Weakness ARVOS LUXCO: S&P Lowers ICR to 'D' on Distressed Exchange R U S S I A IPOTEKA BANK: S&P Affirms 'BB-/B' ICRs, Outlook Stable IPOTEKA-BANK: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable S E R B I A INDUSTRIJA STAKLA: Serbia to Auction Assets on May 17 SERBIA: S&P Alters Outlook to Positive, Affirms 'BB+/B' SCRs S P A I N TDA CAM 8: Moody's Ups Rating on EUR45.9MM Class B Notes to Ba3 U N I T E D K I N G D O M CARLTON FOREST: Blames Collapse on Industry, Economic Headwinds GOLD RUSH: S&P Assigns Preliminary 'B' Rating, Outlook Stable JOE MEDIA: Bought Out of Administration for Second Time KEMBLE WATER: Fitch Lowers Rating on Senior Secured Debt to 'CC' STONEGATE: Expresses Going Concern Doubt, Races to Refinance Debts TED BAKER: Next, Frasers Express Interest to Acquire Business THAMES WATER: Creditors Pick Advisers for Restructuring Talks TRINITY SQUARE 2021-1: S&P Assigns Prelim B-(sf) Rating to X Notes - - - - - ============= F I N L A N D ============= MEHILAINEN YHTYMA: Fitch Affirms 'B' LongTerm IDR, Outlook Stable ----------------------------------------------------------------- Fitch Ratings has affirmed Mehilainen Yhtyma Oy's Long-Term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. Fitch has also affirmed Mehilainen's EUR1,210 million term loan B's (TLB) senior secured rating at 'B+' with a Recovery Rating of 'RR3/58%'. The affirmation follows the successful amend and extend (A&E) of the group's TLB and revolving credit facility (RCF) by three years to August 2028 and February 2028, respectively, with the final terms in line with its expectations. Fitch does not consider the A&E as a distressed debt exchange as the process was conducted consensually with existing lenders and was not to avoid a restructuring. The affirmation also reflects improved operating performance in 2023 and its expectations that the higher earnings base will remain steady in 2024-2025, allowing for low- to mid- single digit free cash flow (FCF) generation. Alongside reduced financial leverage this creates decent headroom under the rating. KEY RATING DRIVERS Successful A&E Eases Refi Risk: Following the completion of its A&E, the group has lower refinancing risk, which Fitch views as manageable, with no debt maturities until 2028. The final terms of the A&E are in line with its prior expectations and Fitch expects interest costs to remain around EUR85 million-EUR95 million per year to 2027, corresponding to 1.8x-2.0x EBITDAR interest coverage, adequate for the rating. Stabilised Operating Environment: Mehilainen's operating backdrop has improved in the past 12 months with reimbursement rate rises, lower staff shortages and reducing cost inflation. Together with successful repricing of the company's contracts, including some that had become unprofitable in 2022 and a recovery in social care profitability, this led to an improvement of more than 300bp in the group's EBITDA margin to 12.5% in 2023. Reimbursement rates are set to remain supportive in 2024 and the staffing environment has stabilised in Finland so Fitch does not expect the group to have to resort to expensive external labour as it did in 2022. Improving Credit Metrics: Fitch expects the EBITDA margin to stabilise around 13%-13.5% in 2024-2027, with improving FCF generation in the low- to mid- single digits as a percentage of sales, and financial leverage remaining between 5x-6x, which provides strong rating headroom. Positive rating action would depend on further evidence of sustainability of improved operating and FCF margins and fixed-charge coverage trending towards 2x. Robust FCF Generation: Mehilainen has maintained positive FCF, which Fitch expects to continue at around 3%-5% margin averaging around EUR90 million to 2027, after investments in greenfield units. It will be supported by resilient operating profitability and relatively low capex for the sector at 2.5%-3% of revenue. Fitch expects the company to reinvest most of its FCF in earnings-accretive M&As. Fitch has revised its annual acquisition assumption up to EUR75 million from EUR50 million as Fitch assumes the company may be more acquisitive after the A&E completion. Growth Strategy Outside Home Market: Mehilainen has shifted its strategy from consolidation in its home market to expansion in new geographies to increase long-term growth opportunities. Germany and Sweden are the key geographies for Mehilainen's expansion, with different regulatory regimes, offering freedom of choice to patients. The record of successful M&A completion suggests moderate execution risk around the strategy. Fitch views increased geographical diversification as positive for the rating in the long term as it reduces Mehilainen's exposure to increasing regulatory scrutiny in Finland. Fitch notes that presence in new markets only becomes economically reasonable with meaningful scale. Diversified Defensive Operations: As a social infrastructure asset, Mehilainen benefits from stable and steadily growing demand across its diversified services. Its strong position in the Finnish private healthcare and social care markets with reasonable scale supports its ability to maintain operating and cash-flow profitability amid regulatory changes. With regulatory staffing requirements evolving in Finland, Mehilainen is actively managing staff costs at a lower and more predictable level by educating and hiring medical workers from low labour cost regions outside the company's home market. DERIVATION SUMMARY Unlike most Fitch-rated private healthcare service providers with a narrow focus on either healthcare or social care services, Mehilainen is an integrated service provider with diversified operations across both markets. It has a meaningful national presence in each type of service, making its business model more resilient to weaknesses in individual service lines. Mehilainen also benefits from a stable regulatory framework, which encourages competition from private healthcare providers, although it has led to some margin pressures particularly in 2022, with higher staff-to-patient requirements. Mehilainen's moderate financial leverage is balanced by adequate operating profitability and positive cash flow generation given its asset-light business model with low capital intensity. Mehilainen and French private hospital operator Almaviva Development's (B/Stable) ratings reflect strong national market positions, reliance on stable regulation limiting the scope for profitability improvement, low single-digit FCF margins, moderate to high leverage of 5.0x-7.0x and M&A-driven growth strategies. After a strong financial performance in 2023, Mehilainen has built up rating headroom at its 'B' rating compared with Almaviva. KEY ASSUMPTIONS - Revenue growth of around 9% in 2024 driven by mid-single digit organic growth (includes higher prices) as well as bolt-on M&A; annual revenue growth of 5%-6% thereafter - EBITDA margin (Fitch-defined, excluding IFRS 16 adjustments) to remain stable around 13%-13.5% to 2027 - Capex averaging 2.5%-3.0% of revenue. - Small working capital cash outflows of around EUR5-EUR10 million per year - Ongoing business restructuring and optimisation changes included in FFO as recurring business costs. - Bolt-on acquisition spending of around EUR75 million a year to 2027. - No shareholder distributions. RECOVERY ANALYSIS The recovery analysis assumes that Mehilainen would be reorganised as a going concern (GC) in bankruptcy rather than liquidated. Fitch estimates post-restructuring GC EBITDA at around EUR135 million, reflecting a post-distressed EBITDA sufficient to cover about EUR90 million in forecast average interest expenses in 2024-2025 and capex spend of EUR45 million. Fitch views this level of EBITDA as appropriate for the company to remain a GC, reflecting possible benefits post-distress. Fitch continues to apply a distressed enterprise value/EBITDA multiple of 6.5x, implying a premium of 0.5x over the sector median, reflecting Mehilainen's stable regulatory regime for private-service providers in Finland, a well-funded national healthcare system and the company's strong market position across diversified service lines. The allocation of value in the liability waterfall results in a Recovery Rating of 'RR3' for the post-A&E first-lien senior secured TLB of EUR1,210 million, indicating a 'B+' instrument rating with a waterfall-generated recovery computation of 58% based on current assumptions. The TLB ranks pari passu with a EUR150 million RCF, which Fitch assumes to be fully drawn prior to distress. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Successful execution of medium-term strategy leading to a further increase in scale with EBITDA margins above 13% on a sustained basis; - Continued supportive regulatory environment and Finnish macro-economic factors; - FCF margins remaining at mid-single-digit levels; - Total adjusted debt/EBITDAR improving towards 6.0x and EBITDAR/gross interest + rents trending towards 2.0x. Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Pressure on profitability with the EBITDA margin declining towards 10% on a sustained basis as a result of weakening organic performance, productivity losses with fewer customer visits, lower occupancy rates, pressure on costs, or weak integration of acquisitions; - Risk to the business model resulting from adverse regulatory changes to public and private funding in the Finnish healthcare system, including from the health and social services reform; - Total adjusted debt/EBITDAR above 7.5x and cash from operations-capex/total debt falling to low single digits due to operating underperformance or aggressively funded M&A, and/or EBITDAR/gross interest + rents below 1.5x - As a result of the above adverse trends, declining FCF margins to low single digits. LIQUIDITY AND DEBT STRUCTURE Solid Liquidity Following A&E: Following the A&E, Mehilainen has a comfortable liquidity position, composed of cash on balance sheet of around EUR146 million alongside a fully-undrawn EUR150 million RCF. Fitch expects the Fitch-adjusted cash balance to remain stable around EUR120-EUR170 million, with excess FCF generation mostly used towards bolt-on acquisitions. ISSUER PROFILE Mehilainen is an integrated provider of primary healthcare and social care services, operating through 840 medical units across Finland, Estonia, Sweden and Germany. ESG CONSIDERATIONS Mehilainen has an ESG Relevance Score of '4' for exposure to social impact due to the company operating in highly regulated healthcare and social-care markets, with a dependence on the public healthcare funding policy, which has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors. 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 ----------- ------ -------- ----- Mehilainen Yhtiot Oy senior secured LT B+ Affirmed RR3 B+ Mehilainen Yhtyma Oy LT IDR B Affirmed B =========== F R A N C E =========== ATOS SE: To Receive EUR450MM in Financing Amid Creditor Talks ------------------------------------------------------------- Mauro Orru at The Wall Street Journal reports that Atos said it reached an agreement in principle with a group of banks, bondholders and the French State for much-needed liquidity until the troubled French IT company strikes a definitive agreement with creditors to trim its debt pile and restore profitability. According to the Journal, the group said on April 9 that it would receive EUR450 million (US$488.8 million) in financing to keep operations going as it aims to strike a deal with financial creditors on a new capital structure by July. Atos needs EUR600 million in cash to fund the business over the 2024-25 period and said existing stakeholders and third-party investors can submit proposals by April 26, though it cautioned that a new agreement would most likely dilute their current shareholding in the company, the Journal discloses. The announcement comes two days after Onepoint, a consulting firm that commands a 11.4% stake and voting rights in Atos, said that Paris-based investment company Butler Industries was joining it in a consortium to rescue Atos from a net debt pile of EUR2.23 billion, a sizeable amount for a company with roughly EUR257.3 million in market value, the Journal notes. Onepoint, as cited by the Journal, said the consortium would present a plan to Atos's board of directors by the end of April aimed at restructuring its debt while preserving all of its assets and restoring profitability. Atos has been through a tumultuous few years, the Journal relays. It lost several executives after a failed takeover attempt in 2021 and issued a number of profit warnings that dented investor confidence, the Journal recounts. The group ended 2023 with a net loss of EUR3.44 billion after booking impairment charges and reorganization expenses, the Journal discloses. The company had sought to raise funds by selling some of its assets in recent months, but talks with investors fell through, according to the Journal. Atos had been in discussions to sell its big data and security unit to Airbus for up to EUR1.8 billion, the Journal states. It also held separate talks to sell its Tech Foundations business to an investment company steered by Czech billionaire Daniel Kretinsky for EUR2 billion, the Journal notes. At the time, Atos said it was looking at alternatives that will take into consideration "the sovereign imperatives of the French state," the Journal relays. Some French lawmakers have sought to nationalize the embattled group, the Journal states. CGG SA: S&P Raises Rating to 'B-', Outlook Stable ------------------------------------------------- S&P Global Ratings raised to 'B-' from 'CCC+' its ratings on seismic services and tech group CGG and its senior secured notes. The stable outlook reflects S&P's expectation that CGG's profits will improve over the next 12 months, supported by decent activity for the seismic sector, coupled with cost discipline and the gradual removal of some legacy liabilities. S&P said, "The upgrade mainly reflects our expectation that CGG's financial performance will strengthen in 2024-2025 Although the group did not meet our projection of reported EBITDA of $450 million at end-2023, we think that numerous supporting factors should enable the company to do so by end-2024. Last year's EBITDA landed at $348 million. We understand that the weaker performance stemmed from the late recognition of some projects (including those in Brazil and Norway), which will be recorded in 2024 instead. This year, performance will improve on the back of the completion of large Earth Data surveys initiated in 2022 and 2023, as well as favorable demand in proven basins and offshore greenfield projects, particularly in Middle East and North Africa. We also factor in the end of penalties linked to an idle vessel (Shearwater) that will eliminate an annual negative impact of about $50 million from early 2025. These developments underpin our assumption that the company will report EBITDA of about $500 million by year-end, ultimately leading to S&P Global Ratings-adjusted leverage below 5x, which we view as a condition for the 'B-' rating. "CGG's capital structure has become more manageable, in our view, given its ability to generate free operating cash flow (FOCF) in 2023. The company expects to post annual FOCF of $100 million, which we view as realistic. This better positions the company to proactively refinance its main 2027 maturities of about $1.1 billion and that of its undrawn revolving credit facility (RCF) maturing in October 2025. We note the planned slight gross debt reduction illustrated by the announced $30 million buy back that should occur later in 2024, which we view as opportunistic and limited in size. We qualitatively factor in the group's cash (of at least $350 million in our 2024-205 forecasts) rather than deduct it from our debt metrics. We note that reported net debt (excluding leases) was already 2.4x at end-2023 versus adjusted debt to EBITDA of about 8.0x. (In our adjusted EBITDA figures, we deduct about $200 million capitalized development costs from reported EBITDA.) "The stable outlook reflects our expectation that CGG will deliver stronger profits in the next 12 months, on the back of decent activity for the seismic sector alongside cost discipline and the gradual removal of some legacy liabilities. "Under our base-case scenario, we forecast reported EBITDA of about $500 million and FOCF of $50 million-$100 million in 2024, translating into 4.0x-4.5x debt to EBITDA. "We also assume that the company will be able to refinance its RCF at least one year before it matures (i.e. October 2024)." Rating pressure could materialize in the next 12 months if CGG cannot sustain adjusted leverage below 5x within a year. This could stem from adverse market conditions or major operational issues, or the company's inability to generate at least $50 million FOCF under normal conditions. S&P sees the possibility of an upgrade as remote in the next 12-24 months given the company's gross debt burden and sizable maturities in 2027. Rating upside could develop overtime if the company sustainably lowers adjusted debt to EBITDA well below 4.0x and steadily made pronounced reductions in its gross debt. FINANCIERE GROUPE: S&P Affirms 'B' Long-Term ICR, Outlook Stable ---------------------------------------------------------------- S&P Global Ratings affirmed its 'B' long-term issuer credit rating on Financiere Groupe Proxiserve (Proxiserve) as well as the 'B' issue rating on the group's EUR335 million term loan B, due in March 2026. The '3' recovery rating is unchanged, reflecting its expectation of meaningful recovery prospects (rounded estimate: 60%) in the case of a payment default. S&P does not rate the revolving credit facility. The stable outlook reflects S&P's expectation that Proxiserve will deleverage to adjusted debt to EBIDTA slightly below 5x by end-2024 and comfortably sustain positive FOCF, while preparing to refinance its upcoming maturities. S&P expects all of Proxiserve's businesses, excluding Edenkia, to increase their revenues in 2024. This growth will stem from price increases linked to indexation clauses embedded in contracts for the submetering and maintenance division, as well as higher volumes for all businesses, driven by commercial wins. That said, S&P forecasts that the group's total revenue will contract 3% in 2024 due to the negative impact that lower electricity prices will have on Edenkia's revenue. This business' volumes will continue to grow organically, however, on the back of new contract wins yielding an expected increase in 573 gigawatt hours (GWh), including 50 GWh of gas to be sold to clients, versus 523 GWh of electricity only in 2023. S&P said, "We anticipate that S&P Global Ratings-adjusted EBITDA margins will expand significantly in 2024 to a forecast 15.7% in 2024 from 14.5% in 2023.The main driver will be a favorable revenue mix, with lower Edenkia sales. This division's margins are below the group average and therefore weigh on the group's margins. We expect price increases and productivity gains will bolster profitability for all divisions. "We forecast that higher capital expenditure (capex) won't stop Proxiserve from comfortably generating free operating cash flow (FOCF) of EUR24 million in 2024.According to our projections, higher EBITDA and a minor working capital inflow will compensate for significantly higher capex, translating to FOCF representing 6% of debt. We assume that this year's anticipated revenue decline will lead to the release of about EUR1 million of working capital. At the same time, Proxiserve will need to make sizable investments in its submetering division because of the numerous new contracts it won in 2023. This will bring capex to EUR37 million in 2024, corresponding to 6.7% of revenue, from EUR28 million in 2023 (4.9%), out of which EUR23 million relates to submetering development capex (EUR17 million in 2023). "Proxiserve's upcoming refinancing could result in higher leverage than the adjusted 4.7x and 4.5x we anticipate for 2024 and 2025, respectively. Benefitting from the EUR270 million (of a total of EUR335 million term loan B) hedged at a fixed-base rate of 40 basis points, we expect that the cash interest expense will remain broadly stable in 2024, at EUR19 million. Consequently, S&P Global Ratings-adjusted funds from operations (FFO) to debt will improve to 15% in 2024 and FFO cash interest coverage will surpass 4x. Nevertheless, we acknowledge that Proxiserve will need to refinance its capital structure in the near term--the revolving credit facility (RCF) matures in September 2025 and the term loan B in March 2026--which could imply some releveraging to fund growth or shareholder returns. "The stable outlook reflects our view that Proxiserve will sustain solid financial performance on the back of its strong positions in the French submetering and boiler maintenance services markets. We forecast that higher S&P Global Ratings-adjusted EBITDA margins of about 15.7% thanks to a favorable mix effect and positive FOCF will reduce adjusted debt to EBITDA to about 4.7x by end-2024. The stable outlook also factors in our expectation that the company will proactively refinance. "We could lower the rating if the group faced a marked EBITDA contraction, causing FFO cash interest coverage to reduce to below 2.0x on a sustained basis. In addition, if we thought FOCF would turn materially negative, and remain so, we could consider a negative rating action. Likewise, we could lower the ratings if liquidity tightened, or sizable debt-financed acquisitions reflected a more aggressive financial policy than we currently expect. "We could also take a negative rating action if Proxiserve does not actively seek refinancing within the next six months. "We could consider an upgrade if Proxiserve sustained an increase in EBITDA such that adjusted debt to EBITDA fell below 5.0x, while demonstrating a financial policy that supports lower leverage over time. Under such a scenario, we would also expect the group's FOCF to improve, with adjusted FOCF to debt approaching 5% following the submetering investment phase. "Environmental and social factors have no material influence on our credit rating analysis of Proxiserve. The company's submetering business benefits from energy efficiency trends, which require more frequent reading of energy consumption and are driving demand for the new generation of sub meters. However, its electricity and gas distribution activities could be negatively affected in the long term by savings trends. We assess the impact of governance factors as moderately negative because of Vauban's tolerance for relatively high leverage." GETLINK SE: Fitch Affirms 'BB' Bond Rating, Alters Outlook to Pos. ------------------------------------------------------------------ Fitch Ratings has affirmed Channel Link Enterprises Finance Plc's (CLEF) notes at 'BBB' with a Stable Outlook. Fitch has also affirmed Getlink S.E.'s (GET) EUR850 million green bond at 'BB' and revised the Outlook to Positive from Stable. RATING RATIONALE GET's credit profile has been improving recently, mainly thanks to ElecLink's strong start of operations and the Eurotunnel re-gaining operating stability, both contributing robust cash flows to the holding company during 2022 and 2023. In this context, GET accumulated around EUR800 million of cash as of December 2023, which could be used to reduce its gross debt exposure. This is reflected in the Positive Outlook. GET is credit-linked to CLEF, which is a ring-fenced vehicle secured by Fixed Link's (FL or Eurotunnel) activities. Fitch assesses GET's consolidated profile, comprising Eurotunnel, ElecLink and Europorte, at 'BBB' and apply a three-notch downward adjustment to arrive at its 'BB' rating. GET's 'BB' rating reflects the structural subordination of its debt and its 'Weaker' debt structure assessment, reflecting refinancing risk associated with its single bullet debt. This is based upon the subordinated and restricted access GET has to cash flows generated by its wholly-owned subsidiary Eurotunnel Holding SAS and the unrestricted, albeit volatile income GET receives from its subsidiary, ElecLink. CLEF's rating is underpinned by the critical nature of the asset managed by Eurotunnel, the fixed railway link between the UK and France, the long-term maturity of the concession terminating in 2086 and the historical resilience of passenger volumes on the high-speed trains and car shuttle business. Macro short-term uncertainties and management's focus on yields rather than on volumes, could weigh on medium-term shuttle traffic, which Fitch assumes to be at the 2019 level by 2036 for cars, and 2038 for trucks. CLEF's average debt service coverage ratio (DSCR) of 1.5x is solid and commensurate with its credit profile at 'BBB', considering periods of slightly lower coverage under the Fitch rating case (FRC) as well as modest volume growth given the current pricing strategy. KEY RATING DRIVERS Mixed Traffic Performance - Volume Risk: High-Midrange Traffic volume proved resilient through economic recessions for Eurostar passengers and car shuttle volumes, while truck shuttle volumes showed significant volatility (-46% in 2007-2009), partly because of the 2008 tunnel fire. Eurotunnel is able to differentiate itself from competing ferry operators in the Dover Strait and command a premium on ferry fares, due to the speed, ease and reliability of its shuttle service. Nonetheless, competition and exposure to discretionary demand constrain the rating. Some Flexibility - Price Risk: Midrange Shuttle service fares are flexible and can be adapted to market conditions. Historically, this has helped Eurotunnel to quickly recover volume loss on the truck, and to a lesser extent, car businesses. The railway usage contract regulates railway network fares, preventing a full pass-through of inflation into tariffs. ElecLink started commercial operations in May 2022, adding revenue diversity to GET's consolidated credit profile. However, in its view, ElecLink's cash flows could be volatile due to its exposure to electricity price risk in the French and UK markets and the possible impact from the profit-sharing mechanism embedded in ElecLink's concession framework. Largely Maintenance Capex - Infrastructure Development and Renewal: Midrange The lack of formal provisioning for capex under the financing documentation is mitigated by strong UK/French regulatory oversight, Eurotunnel's prudent management policy as tunnel operator and the inclusion of minimum capex in the dividend distribution lock-up covenant calculation. Capex is generally funded with projected cash flows and investments are planned in advance and considering market conditions. In its view, this provides some flexibility in delivering the capex programme. Fully Amortising, Back-Ended - Debt Structure: Midrange (CLEF) Debt is senior, largely fixed-rate and fully amortising but with a back-loaded repayment profile. Debt is almost evenly split between sterling and euros, substantially mirroring EBITDA exposure. Structural features include standard default/lock-up tests with cash-sweep mechanism and a EUR270 million liquidity reserve, which currently covers 12 months debt service, but reduces to six months from 2039 due to the back-ended repayment profile of the debt. Refinancing and additional debt are subject to rating affirmation. Single Bullet Debt with Refinancing Risk - Debt Structure: Weaker (Getlink) The EUR850 million five-year fixed rate bullet bond is due in 2025. Fitch views refinancing risk as moderately high, due to the deep subordination and the use of a single-bullet maturity, mitigated by the 12-month debt service reserve account and the cash on balance sheet at the GET level. The protective features of the consolidated-based lock-up and incurrence covenants are diminished by the possibility of raising prior-ranking non-recourse debt at subsidiaries and the presence of sizeable baskets for additional debt and dividends. Structural Subordination - Issuer Structure GET is not a single-purpose vehicle as it is invested in multiple businesses (Fixed Link, Europorte, Eleclink) and its debt is structurally subordinated to the project finance-type debt at CLEF. There is strong structural protection under CLEF's issuer-borrower structure, including lock-up provisions potentially triggering a cash sweep and additional indebtedness clauses subject to rating tests, which limits debt being pushed down from the holding company. These factors drive its rating approach and together with the 'Weaker' debt structure assessment explain the three-notch difference between GET and the consolidated profile, the latter largely driven by Eurotunnel's core activities. The key rating drivers of the consolidated profile are in line with CLEF, as it dominates the consolidated group's EBITDA generation. Financial Profile The FRC results in a DSCR averaging 1.50x during 2024-2049, with a minimum DSCR of 1.18x in 2041. PEER GROUP Like High Speed Rail Finance (1) PLC (HS1; A-/Stable), CLEF has exposure to Eurostar. However, CLEF is exposed directly to Eurostar passenger volumes, while HS1 is exposed to the number of train paths, which are inherently less volatile, although ultimately exposed to the same performance drivers. HS1 also benefits from having around 60% of its revenues supported by the UK government via underpinned "availability" payments, ultimately leading to its higher rating. Fitch compares GET's structural subordination with that of Gatwick Airport Finance plc (GAF; BB-/Stable). GET's notes are similarly structurally subordinated to cash-flow generation, although both have full ownership of the underlying asset. GET has a more diversified dividend stream than GAF and its main controlled subsidiary is not in lock up. This leads to narrower notching from the consolidated credit profile than that applied to GAF. Scandlines ApS (SCL; BBB/Stable) operates sea ferry routes between Denmark and Germany. The rating is supported by high barriers to entry within a captive regional market and by SCL's strong ferry operations on two key point-to-point routes between Denmark and Germany. The DSCR at 1.9x is higher than FL (CLEF), but CLEF is a stronger and more strategic asset. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade CLEF Annual FRC FL DSCR consistently below 1.3x. GET A downgrade of the consolidated group's credit profile would lead to a downgrade of GET. Failure to prefund GET's debt well in advance of its maturity could be rating-negative, as could a material increase in debt at GET or its subsidiaries. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade CLEF Annual FRC FL DSCR consistently above 1.5x, subject to clearer visibility on traffic recovery. GET An upgrade of the consolidated group's credit profile could lead to an upgrade of GET. The notching difference with the consolidated credit profile could be reduced if cash at GET is devoted to reduce current gross debt exposure, provided that GET continues to have direct and unconditional access to ElecLink's cash flows. CREDIT UPDATE Despite lower traffic volumes, Eurotunnel's 2023 revenues were 17% higher than 2019, mainly thanks to higher yields due to management's current premium price strategy. EBITDA was 5% above 2019. In 2023, passenger shuttles volumes were at 85% of 2019 level with a 58% market share. Truck shuttles volume were 75% of the 2019 level while Eurostar transported 10.7 million passengers, or 97% of 2019 volumes. Eurotunnel's capex was EUR140 million in 2023 and it forecasts investing a further EUR150 million to 200 million per year in the coming years, mainly on rolling stock maintenance and renewal programmes. ElecLink started operations in May 2022 and posted revenue of EUR558 million in 2023 taking advantage of the favourable electricity spread during the year. ElecLink recorded a provision of EUR156 million (EUR142 million in 2022) due to the profit-sharing mechanism embedded in its concession contract but Fitch does not expect potential related cash out before 2025. ElecLink's EBITDA was EUR368 million, post provision. Fitch expects ElecLink's financial contribution to normalise at around EUR160 million revenues and EUR45 million EBITDA. Cash available at Getlink group was around EUR1.6 billion as of December 2023. FINANCIAL ANALYSIS The FRC incorporates conservative assumptions for traffic recovery, reflecting a potential delay in volume recovery resulting from management's strategy to keep high-yields in a muted post Brexit economic environment. Fitch expects now truck shuttles to fully recover to 2018 levels by 2045, car shuttles by 2041 and Eurostar traffic by 2027. After recovery, Fitch assumes volumes will grow below blended UK-France GDP. Fitch expects yields on the shuttle business to remain higher than in 2019, backed by management's premium price strategy and to partially track inflation beyond 2024, while the railway network will mechanically follow the fares set by its regulatory framework Fitch has stressed management's opex and capex projections. Fitch has stressed the costs of debt for FL's floating-rate notes and the EUR850 million bonds. This results in an average DSCR of 1.5x until debt maturity (2024-2049). 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 Prior ----------- ------ ----- Getlink S.E. Getlink S.E./Senior Secured Debt/1 LT LT BB Affirmed BB Channel Link Enterprises Finance Plc Channel Link Enterprises Finance Plc/Senior Secured Debt/1 LT LT BBB Affirmed BBB HOLDING D'INFRASTRUCTURES: Fitch Lowers LongTerm IDR to 'BB+' ------------------------------------------------------------- Fitch Rating has downgraded Holding d'Infrastructures des Metiers de l'Environnement's (SAUR) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB+' from 'BBB-'. The Outlook on the IDR is Stable. The Recovery Rating (RR) on the senior unsecured is 'RR4'. The downgrade reflects the weak performance in 2023 and its downward revision of SAUR's expected cash flow generation in 2024-2027, mainly due to an extended delay in passing through increasing costs in French municipal water activity and lower cash-in expected from working capital. As a result, Fitch expects funds from operations (FFO) net leverage to be sustained above its 4.5x negative threshold for the 'BBB-' rating. The Stable Outlook reflects its expectation that SAUR's FFO net leverage, which Fitch forecasts at around 6.5x in 2024, will reduce by 2026 to 5.0x, consistent with the new sensitivity (5.2x). Fitch expects tariff indexation formulas, organic growth and efficiencies arising from ongoing cost and working capital optimisation plan will support profitability and cash flow generation. The shareholder record of equity injections to support M&A and its commitment to returning to investment-grade metrics also support the Stable Outlook. KEY RATING DRIVERS Delayed Deleveraging: SAUR's FFO net leverage for 2023 was 8.3x, not far from the 7.9x Fitch expected in November 2023. However, Fitch now expects slower deleveraging, with credit ratios not consistent with an investment-grade rating throughout the forecast horizon. This is mainly driven by the lower than expected tariff revision from 2024 in the Water France business. Slower Recovery in 2024: The company's cost pass-through mechanism has been partially delayed, resulting in a material lag between tariff revision and cost increases, mainly due to inflationary pressure and the energy crisis. As a result, Fitch has revised its EBITDA projections down by approximately EUR 50 million annually on average for 2024-2026, compared with its estimates from November 2023. Fitch now expects Fitch-calculated EBITDA to be around EUR255 million in 2026, from EUR135 million in 2023 (and EUR206 million in 2022). 'BB+' Metrics by 2026: Fitch expects SAUR's FFO net leverage to peak in 2023, then gradually decrease towards 5.0x in 2026, which would be consistent with a 'BB+' rating, driving the Stable Outlook. The deleveraging path will be supported by organic growth, reducing cost pressure from inflation, coupled with stricter focus on efficiency and better cash management. Weak 2023 Performance: SAUR's 2023 performance was slightly weaker than expected with Fitch-adjusted EBITDA declining by 35% from last year (versus 30% expected in November 2023). The year-on-year decline is mainly related to the Water France underperformance coupled with lower volumes distributed as a consequence of water usage restrictions enforced by municipalities during the dry summer of 2023. Higher levels of exceptional costs and M&A fees also contributed to the reduction. Working Capital Underperformance: SAUR's working capital absorption has been materially higher than expected with an outflow of EUR93 million in 2023. This was mainly driven by the Water France segment, due to a combination of reduction of outstanding days payables, temporary peak in inventory and a lag in collecting 2023 tariff indexation from customer invoices. This has been accompanied by industrial water growth, which requires a higher level of working capital, and some additional bad debt at Water France. Fitch have revised down its expectation of working capital recovery with a contribution to cash-flow from operations of EUR7 million per year for 2024-2026 against its previous projection of EUR33 million per year. Focus on Efficiencies: Following changes at managerial level and the reorganisation of the French business during 2023, SAUR has launched a cost optimisation plan for 2024, mainly focused on personnel expenses, external expenditures and procurement. The company anticipates annual savings of approximately EUR56 million, which Fitch has largely incorporated in its forecasts. The company also foresees a reduction of extraordinary expenses to around EUR15 million annually (EUR32 million in 2023). Cash Management is Key: Management is implementing working capital optimisation initiatives, with the goal of a net cash impact of approximately EUR50 million in 2024, which is included in its forecasts. These include a more stringent procurement policy, streamline invoicing and collections processes, and promoting advance payments from industrial clients, among others. Strong Commercial Dynamics: SAUR benefits from a good organic growth momentum (around 8% yoy growth in the last three years) supported by industrial water development and the good commercial dynamics of Water France. The company benefits from a strong backlog (EUR7.4 billion excluding industrial water in 2023, up 14% on 2022) bringing good visibility of future revenues, supported by a historically low churn rate. This is accompanied by a consistent record of securing contracts in recent years. Active M&A Strategy: SAUR has closed several acquisitions since 2020, mainly to develop its industrial water business. The most recent acquisitions, including Natural Systems Utilities, CirTec and Ekos in the international business, will enhance SAUR's position in industrial water and provide cross-selling opportunities. Management expects to increase its focus on efficiency and organic growth but Fitch still expects the company to continue with its opportunistic external growth strategy for 2024-2027, assuming that this will be partially funded by equity support from the shareholder. Shareholder Support: SAUR's main shareholder, EQT Infrastructure, has been supportive of SAUR's growth strategy by providing equity for M&A and avoiding dividend distributions. The new shareholders (PGGM and DIF), following EQT's disposal in June 2023 of its 50% stake in SucreAcquisitionCo (holder of 97.6% of SAUR), are aligned with SAUR's strategy and financial policy. Fitch expects Saur to finance around EUR65 million of acquisitions with equity, of which EUR40 million is already funded. The shareholders' commitment to the investment grade is a key consideration for the Stable Outlook, notwithstanding the expected high leverage during 2023-2025. DERIVATION SUMMARY SAUR is France's third-largest water and wastewater management company in France, behind Veolia Environnement S.A. (BBB/Stable) and Suez. After the completion of Veolia's tender offer on Suez, Veolia became the world's biggest operator in water and wastewater management. The "New Suez" has retained its second position in the French water distribution market and continues to run, to a lesser extent, wastewater and hazardous waste management. Both companies benefit from larger scale and a greater presence outside the domestic market than SAUR. In the water sector, these peers also benefit from larger and more profitable contracts, which explains their higher profitability even though they operate under the same contractual framework as SAUR. This drives higher debt capacity of 5.2x for Veolia at 'BBB', while the same level applies for a 'BB+' for SAUR. FCC Aqualia, S.A. (BBB-/Stable), the Spanish water concessions operator, is SAUR's closest peer in business mix and scale. Aqualia's municipal business accounts for about 90% of EBITDA, compared with around 70% expected for SAUR at end-2023. Overall, Fitch sees Aqualia's business risk as slightly better than that of SAUR, with longer average concession residual life, higher renewal rates, better profitability due to higher capex intensity, and a contractual framework that includes financial equilibrium mechanisms. This allows for higher debt capacity with a threshold for investment grade at 5.0x for FFO net leverage for Aqualia compared with 4.5x for SAUR. KEY ASSUMPTIONS - Strong revenues growth yoy in 2024 (13.6%), followed by revenue CAGR of about 6% for 2024-2027, supported by organic development (mainly industrial and municipal water in France and Spain), stable renewal rates at 75% and tariffs indexed to inflation. - Fitch-calculated consolidated EBITDA margin gradual increase to about 10% by 2026 (about 6.5% in 2023; 7.8% in 2024 and 9.1% in 2025) - Average capex of about EUR210 million a year over 2024-2027, and net M&A-related cash flows of EUR65 million in 2024 - 2024 M&A equity funded - No dividends over the period RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade - FFO net leverage below 4.5x on a sustained basis, accompanied with tangible recovery of EBITDA margin Factors that could, individually or collectively, lead to negative rating action/downgrade - Failure to show a credible deleverage pattern towards 5.2x FFO net leverage by 2026 at the latest - Persisting earnings volatility due to changes in public contract agreements or regulatory frameworks or to a less contracted business mix or contracted with higher-risk counterparties, for example with industrial water rising above 35%-40% of total EBITDA (around 27% forecast in 2023), could lead Fitch to review SAUR's debt capacity for the current rating. LIQUIDITY AND DEBT STRUCTURE Adequate Liquidity: As of December 2023, SAUR's liquidity position was EUR524 million. This included EUR324 million of cash and EUR200 million of an unused committed revolving credit facility. Fitch views liquidity as sufficient to cover short-term debt maturities and capex needs for the next 12 months. SAUR will have to refinance a EUR450 million bond maturing in September 2025. ISSUER PROFILE SAUR is an integrated water and wastewater treatment and distribution operator for households and a water services provider for industries. It also provides engineering and procurement and other water-related works for municipalities and serves more than 20 million residents and 9,200 municipalities. 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 ----------- ------ -------- ----- Holding d'Infrastructures des Metiers de l'Environnement LT IDR BB+ Downgrade BBB- senior unsecured LT BB+ Downgrade RR4 BBB- LABORATOIRE EIMER: Moody's Cuts CFR to B3, Outlook Remains Stable ----------------------------------------------------------------- Moody's Ratings has downgraded Laboratoire Eimer's (Biogroup or the company) corporate family rating to B3 from B2 and its probability of default rating to B3-PD from B2-PD. Moody's has downgraded to B3 from B2 the instrument rating on the EUR1.75 billion senior secured term loan B, the EUR1.15 billion senior secured notes, and the EUR270 million senior secured revolving credit facility (RCF) issued by CAB. At the same time, Moody's has downgraded to Caa2 from Caa1 the instrument rating on the EUR250 million senior unsecured notes issued by Laboratoire Eimer. The outlook remains stable for both entities. RATINGS RATIONALE The ratings action reflects governance considerations, in particular related to financial strategy and risk management, including tolerance to high leverage. In Moody's view, there is a weakening financial profile with Moody's-adjusted credit metrics which will no longer be commensurate with a B2 rating. It also reflects the execution risks with regards to the company's cost savings programme, which could translate into weaker EBITDA hence continued elevated adjusted leverage. Similar to that of other European laboratories, Biogroup's EBITDA margin has fallen in 2023. With the loss of COVID-19 testing revenue, steeper tariff cuts in 2023 in France and high cost inflation, profitability dropped below pre-pandemic levels in 2023. Going forward, Moody's anticipates an annual improvement in the company's EBITDA margin driven by cost-saving initiatives and easing inflation. However, cost savings plan entails execution risks in the form of delays or cost overruns. Considering the high fixed costs associated with clinical laboratories, where roughly half of all expenses are typically allocated to personnel, the challenge of restoring profitability to pre-pandemic level is significant. In 2023, Moody's estimates an adjusted gross debt to EBITDA ratio of 8.3x, exceeding the guidance for a B2 rating. In 2024, Moody's forecasts an adjusted gross debt to EBITDA ratio of 7.9x. Although Moody's expects the company to improve its financial metrics over the next two to three years, adjusted leverage reduction is subject to execution risk. The adjusted leverage includes an estimated EUR380 million put options granted to minority shareholder biologists as of December 31, 2023, which Moody's views as debt-like liability. In 2023, Moody's-adjusted free cash flow to gross debt ratio was at 3.2%, lower than the B2 rating guidance. In 2024, Moody's forecasts a similar ratio. Laboratoire Eimer's ratings are supported by (1) the company's scale, leading position and network density in France (Government of France, Aa2 stable); (2) the positive demand trends for clinical laboratory tests; (3) a strong EBITDA margin, coupled with limited capital spending needs, which translates into positive free cash flow (FCF); and (4) the very good liquidity with cash of EUR610 million as of December 31, 2023. Conversely, the ratings are constrained by (1) the concentration in France and exposure to change in regulation and continuous tariff pressure, which will limit organic growth; (2) the high fixed-cost base and persistent inflationary pressures; (3) the highly-leveraged financial profile and risk of future debt-funded acquisitions. LIQUIDITY Biogroup's liquidity is very good supported by cash of EUR610 million and the undrawn senior secured revolving credit facility (RCF) of EUR270 million as of December 31, 2023. In 2024, Moody's forecasts free cash flow of EUR120 million. Moody's assumes around EUR100 million of share buyback linked to minority shareholder put options, as well as around EUR40 million of dividends. M&A operations constitute a significant growth catalyst for Biogroup, contributing to both economies of scale and efficiency enhancements. Considering the company's very good liquidity position, Moody's expects the company to pursue strategic mergers and acquisitions, especially outside of France. These could be partially financed with existing cash, resulting in a reduced cash balance over time. The capital structure is composed of senior unsecured notes EUR250 million due in February 2029, a senior secured term loan B of EUR1.75 billion due in February 2028, senior secured notes of EUR1.15 billion due in February 2028, and a EUR270 million senior secured RCF due in August 2027. STRUCTURAL CONSIDERATIONS The senior secured term loan B, senior secured notes and RCF are issued by CAB, a subsidiary of Laboratoire Eimer. Their B3-PD probability of default rating, in line with the B3 corporate family rating, reflects their pari passu ranking, benefitting from upstream guarantees from material subsidiaries of the group representing at least 80% of the group's EBITDA and 80% of the group's assets. The security package includes shares, intercompany loans and bank accounts. The EUR250 million senior unsecured notes issued by Laboratoire Eimer, the top entity of Biogroup's restricted group, are rated Caa2. The senior secured debt ranks ahead of the senior unsecured notes in the waterfall analysis but they do not benefit from any notching uplift from the CFR, reflecting the limited buffer provided by the relatively limited size of the senior unsecured notes. RATING OUTLOOK The stable outlook reflects Moody's expectation that Biogroup's operating performance and credit metrics will improve over the next 12 to 18 months, notwithstanding the execution risk associated with its cost-saving initiatives. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Upward rating pressure could arise if Moody's-adjusted gross debt to EBITDA falls below 6.5x and Moody's-adjusted free cash flow to debt improves to 5% - all on a sustained basis. Downward rating pressure could develop if Moody's-adjusted gross debt to EBITDA exceeds 7.5x; Moody's-adjusted EBITA to interest expense weakens to below 1.0x; Moody's-adjusted free cash flow to debt remains negative on a sustained basis; and liquidity materially deteriorates. Negative rating pressure could also occur in the event of large debt-financed acquisitions or distributions to shareholders. The principal methodology used in these ratings was Business and Consumer Services published in November 2021. COMPANY PROFILE Established in 1998, Biogroup is the largest clinical laboratory testing in France, with strong market position Belgium, Luxembourg, Spain and Portugal. Biogroup provides a range of routine and specialty laboratory tests. The Eimer family, key shareholders of the company, hold a 44% stake but maintain control over the board of directors with their 80% voting rights. The Caisse de depot et placement du Quebec (Aaa stable) has a 34% stake, while the management team and partner biologists collectively own 16%. ============= G E O R G I A ============= BANK OF GEORGIA: Moody's Rates New $300MM AT1 Notes 'B2(hyb)' ------------------------------------------------------------- Moody's Ratings has assigned a B2(hyb) rating to JSC Bank of Georgia's (Bank of Georgia) proposed USD300 million perpetual Additional Tier 1 (AT1) convertible notes to be issued in April 2024 by the bank. RATINGS RATIONALE The B2(hyb) rating is positioned three notches below the ba2 Adjusted Baseline Credit Assessment (Adjusted BCA) of Bank of Georgia, in line with Moody's standard notching guidance for AT1 securities. This takes into account the credit risks associated to higher risk subordinated debt securities, given the relatively low cushion available for absorbing losses before the AT1 creditors are impacted in a resolution scenario. The principal and any accrued but unpaid distributions on these capital securities would be written down, partially or in full, if at any time the core equity tier 1 (CET1) of the bank on a solo basis is less than 5.125%. In addition, Bank of Georgia, as a going concern, may choose not to pay the interest on these securities on a non-cumulative basis. As such, the interest payments on these capital securities are fully discretionary. These securities are senior to common shareholders but junior to all depositors, general creditors, senior debt and subordinated debt holders. RATING OUTLOOK Ratings on subordinated instruments, including AT1 instruments, do not carry outlooks. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING There is limited upward rating pressure for Bank of Georgia's AT1 securities rating, given that the bank's BCA is already in line with Georgia's sovereign rating. Upward rating pressure will require an upgrade in the rating of the Georgian government. Downward pressure on Bank of Georgia's AT1 securities rating could develop if the bank's BCA is downgraded. Bank of Georgia's BCA could be downgraded in case of a material rise in problem loans, and, therefore, credit costs beyond 3% over an extended period, which would hurt the bank's bottom-line profitability, or the bank's capital metrics failing to increase in line with higher capital requirements. A significant deterioration in the domestic operating conditions in Georgia, as reflected in Moody's Macro Profile for the country, would also strain the bank's ratings. PRINCIPAL METHODOLOGY The principal methodology used in this rating was Banks Methodology published in March 2024. ============= G E R M A N Y ============= GRUNENTHAL PHARMA: Moody's Alters Outlook on 'B1' CFR to Stable --------------------------------------------------------------- Moody's Ratings affirmed Grunenthal Pharma GmbH & Co. KG's (Grunenthal or the company) B1 corporate family rating, its B1-PD probability of default rating and the B1 rating on the backed senior secured notes issued by its subsidiary Grunenthal GmbH. At the same time, Moody's changed the outlook for both entities to stable from positive. RATINGS RATIONALE The rating action reflects Moody's expectations that Grunenthal's sales development in 2024-25 will be weaker than Moody's had previously projected, resulting in credit metrics that will continue to position the company more appropriately at B1, although its positioning will be strong in that rating category. While Grunenthal has performed solidly in 2023, increasing its revenue by 10% and reporting a leverage (Moody's-adjusted debt/EBITDA) of 3.2x, Moody's projects that its sales will decline in 2024-25 and its credit metrics deteriorate as the company faces increased generics competition on some highly-profitable drugs, and incurs costs for the phase 3 trials and launch preparation of RTX (resiniferatoxin), a drug currently studied for osteoarthritis knee pain. In 2023, generic competition on Grünenthal's bestselling drug, Palexia (tapentadol), accelerated with the launch of substitutable generics in Europe, including Germany, its largest market. In 2023, Grunenthal also started to face generic competition on Nebido in Germany and entrance of additional generics in other European markets during 2024 will accelerate Nebido's revenue loss. Moody's does not expect the sales decline of Palexia, Nebido and other mature drugs to be offset by the growth of Qutenza and the integration for the first full year of Grünenthal Meds, the joint venture that Grünenthal established with Kyowa Kirin International plc (KKI), which the agency estimates to add about EUR140 million of sales. Moody's projects that Grunenthal's revenue will decline by 5%-6% annually in 2024-25 and that its EBITDA margin will slightly weaken to around 20%, as cost optimization does not fully offset the negative product mix effects and increased costs on RTX, as Grunenthal prepares for its potential earliest launch in 2026. Moody's projects leverage to be 3.5x-4.0x in 2024-25, a level that is commensurate with a B1 rating, although it will position Grünenthal strongly at B1. The decline in sales in 2024-25 and the execution risks related to the development and successful launch of RTX also increase M&A risk. However, Grunenthal has had a track record of prudent risk management and disciplined acquisition strategy in recent years and Moody's expects the company to maintain a cautious approach to M&A and to limit the impact on its credit metrics. The B1 rating of Grunenthal continues to incorporate its diversified product portfolio of established brands, which supports solid free cash flow (FCF) generation; its good geographical diversification; its expertise in the therapeutic area of pain; and its conservative shareholder distributions and liquidity management. Grunenthal's rating also takes into account its small size, which limits economies of scale and increases the risk of earnings volatility; the large share of its revenue from drugs, which face revenue loss from generic competition; its limited late-stage pipeline, because projects under development will not generate significant earnings over the next three years; and the risk of debt-funded acquisitions. LIQUIDITY Grunenthal has very good liquidity, underpinned by a sizeable cash position of EUR321 million as of December 31, 2023; access to a EUR500 million revolving credit facility (RCF) maturing in 2028, which is currently undrawn; and projected positive FCF of EUR100 million-EUR120 million annually in the next 12 to 18 months. The next debt maturity of the company is its EUR400 million notes due in 2026. The company's RCF contains a net leverage springing covenant set at 6.5x (6.0x from May 2024 onwards), which is tested when the RCF is drawn more than 40%. ESG CONSIDERATIONS Grunenthal's S-4 reflects its high exposure to social considerations which include litigation risks and compliance risks related to the pharmaceutical industry's high manufacturing standards. Outside the US, the company produces opioid products, a type of products that has been subject to litigation, primarily in the US. While Grunenthal currently licenses the right for the production of the opioid drug tapentadol (branded under the names "Nucynta" in the US and "Palexia" in Europe) but never commercialized opioids in the US, it has recently been named as a defendant (among many others) in one litigation in the US. The company has set up several governing bodies and compliance frameworks to require and govern its responsible communication and marketing of opioid products and, since 2017, the company has been focusing its pipeline developments on non-opioid drugs. Grunenthal's G-3 reflects a concentrated ownership and a track record of debt-funded acquisitions to mitigate declining sales of its mature drug portfolio and strengthen its pipeline, but the company has a conservative liquidity management and financial policies. STRUCTURAL CONSIDERATIONS Grunenthal's capital structure comprises EUR1,250 million of backed senior secured notes and a EUR500 million RCF, all issued at the level of Grunenthal GmbH, the main operating company of the group. The backed senior secured notes and RCF are guaranteed by Grunenthal GmbH's parent company and some of the company's subsidiaries. All debt instruments share the same collateral which essentially comprises share pledges on Grunenthal GmbH. Moody's rates the backed senior secured notes at B1, in line with the CFR, and ranks them in line with other financial debts and liabilities. Moody's bases its calculation on a 50% family recovery rate and the PDR is therefore aligned with the CFR at B1-PD. OUTLOOK RATIONALE The stable rating outlook reflects Moody's expectation that Grunenthal's weaker 2024-25 sales development will result in credit metrics that will be commensurate with a B1 rating, although it will be positioned strongly in this rating category. Moody's also expects Grunenthal to maintain its prudent operational execution and financial policies. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS Moody's could upgrade Grunenthal's rating if the company is able to largely offset the revenue and earnings loss from Palexia with the growth of Qutenza and its other drugs, and sustain positive organic revenue growth and an EBITDA margin of around 20% or higher, while also advancing its late-stage pipeline. Quantitatively, a positive rating action would require Grünenthal to maintain Moody's-adjusted debt/EBITDA around 3.5x and robust FCF, both on a sustained basis. Conversely, Grunenthal's rating could come under pressure if its earnings decline for a prolonged period. Moody's could also downgrade Grünenthal's rating if its Moody's-adjusted debt/EBITDA remains above 4.5x for a prolonged period, for instance, because of a debt-financed acquisition. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Pharmaceuticals published in November 2021. COMPANY PROFILE Founded in 1946 and headquartered in Aachen, Germany, Grunenthal is a family-owned pharmaceutical company focused on pain therapies. It is one of the world's largest seller of centrally acting analgesics, which are compounds that inhibit pain by acting on the central nervous system. In 2023, the company generated EUR1.8 billion of revenue. Grunenthal owns a portfolio of about 100 products that it sells in more than 100 countries. ============= I R E L A N D ============= CROSS OCEAN IX: S&P Assigns B- (sf) Rating to Class F Notes ----------------------------------------------------------- S&P Global Ratings assigned credit ratings to Cross Ocean Bosphorus CLO IX DAC's class A to F European cash flow CLO notes. The issuer also issued unrated subordinated notes. The ratings reflect S&P's assessment of: -- The diversified collateral pool, which primarily comprises broadly syndicated speculative-grade senior-secured term loans and bonds that are governed by collateral quality tests. -- The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization. -- The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading. -- The transaction's legal structure, which is bankruptcy remote. -- The transaction's counterparty risks, which are in line with S&P's counterparty rating framework. Portfolio benchmarks CURRENT S&P weighted-average rating factor 2,752.69 Default rate dispersion 530.40 Weighted-average life (years) 5.16 Obligor diversity measure 91.59 Industry diversity measure 19.59 Regional diversity measure 1.27 Transaction key metrics CURRENT Portfolio weighted-average rating derived from S&P's CDO evaluator B 'CCC' category rated assets (%) 1.00 Target 'AAA' weighted-average recovery (%) 8.30 Target weighted-average spread (net of floors; %) 4.58 Target weighted-average coupon (%) 8.68 Under the transaction documents, the rated notes will pay quarterly interest unless a frequency switch event occurs. Following this, the notes will switch to semiannual payments. Rationale The portfolio is well-diversified, primarily comprising broadly syndicated speculative-grade senior-secured term loans and senior-secured bonds. Therefore, S&P has conducted its credit and cash flow analysis by applying its criteria for corporate cash flow CDOs. S&P said, "In our cash flow analysis, we used the EUR400 million target par amount, the covenanted weighted-average spread (4.30%), the covenanted weighted-average coupon (4.50%), the covenanted minimum 'AAA' weighted-average recovery rate (37.30%), and target weighted-average recovery rate for all other rating levels. 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." Until the end of the reinvestment period in April 2029, the collateral manager may substitute assets in the portfolio for so long as our CDO Monitor test is maintained or improved in relation to the initial ratings on the notes. This test looks at the total amount of losses that the transaction can sustain as established by the initial cash flows for each rating, and it compares that with the current portfolio's default potential plus par losses to date. S&P said, "Under our structured finance sovereign risk criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned ratings. "The transaction's documented counterparty replacement and remedy mechanisms adequately mitigate its exposure to counterparty risk under our current counterparty criteria. "The transaction's legal structure and framework is bankruptcy remote, in line with our legal criteria. "Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our ratings are commensurate with the available credit enhancement for the class A to F notes. "Our credit and cash flow analysis indicates that the available credit enhancement for the class B to F notes could withstand stresses commensurate with the same or 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 assigned to these 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." Ratings AMOUNT CREDIT CLASS RATING* (MIL. EUR) INTEREST RATE§ ENHANCEMENT (%) A AAA (sf) 248.00 3mE +1.57% 38.00 B AA (sf) 40.00 3mE +2.70% 28.00 C A (sf) 26.00 3mE +3.47% 21.50 D BBB- (sf) 26.00 3mE +4.60% 15.00 E BB- (sf) 20.00 3mE +6.99% 10.00 F B- (sf) 12.00 3mE +8.62% 7.00 Sub NR 31.19 N/A N/A *The ratings assigned to the class A and B notes address timely interest and ultimate principal payments. The ratings assigned to the class C to 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. 3mE--Three-month Euro Interbank Offered Rate. CTS GROUP: Bought Out of Administration by Ekco, 140 Jobs Saved --------------------------------------------------------------- Tom Lyons at The Currency reports that Ekco, one of Europe's fastest-growing security-first managed cloud services providers, has acquired the Cheshire-based CTS Group from administration, securing 140 jobs. The British provider of cloud and managed IT services to law firms and barristers in Britain and Ireland was hit by a cyber attack in November last year, causing a crisis in the business which led to PwC being appointed as administrators, The Currency relates. It had revenues of about GBP18 million (EUR20.9 million) in its last financial year and employed 140 people servicing its legal customers, The Currency notes. According to The Currency, Malahide-headquartered Ekco, co-founded by Eoin Blacklock and Jonathan Crowe, bought the business last week. HARVEST CLO XX: Moody's Affirms B2 Rating on EUR12MM Class F Notes ------------------------------------------------------------------ Moody's Ratings has upgraded the ratings on the following notes issued by HARVEST CLO XX DAC: EUR12,000,000 Class B-1-R Senior Secured Floating Rate Notes due 2031, Upgraded to Aaa (sf); previously on Mar 16, 2023 Upgraded to Aa1 (sf) EUR30,000,000 Class B-2-R Senior Secured Fixed Rate Notes due 2031, Upgraded to Aaa (sf); previously on Mar 16, 2023 Upgraded to Aa1 (sf) EUR27,500,000 Class C-R Senior Secured Deferrable Floating Rate Notes due 2031, Upgraded to Aa3 (sf); previously on Mar 16, 2023 Upgraded to A1 (sf) EUR20,900,000 Class D-R Senior Secured Deferrable Floating Rate Notes due 2031, Upgraded to Baa1 (sf); previously on Mar 16, 2023 Upgraded to Baa2 (sf) Moody's has also affirmed the ratings on the following notes: EUR246,000,000 (Current outstanding amount EUR236,495,627) Class A-R Senior Secured Floating Rate Notes due 2031, Affirmed Aaa (sf); previously on Mar 16, 2023 Affirmed Aaa (sf) EUR24,000,000 Class E Senior Secured Deferrable Floating Rate Notes due 2031, Affirmed Ba2 (sf); previously on Mar 16, 2023 Affirmed Ba2 (sf) EUR12,000,000 Class F Senior Secured Deferrable Floating Rate Notes due 2031, Affirmed B2 (sf); previously on Mar 16, 2023 Affirmed B2 (sf) HARVEST CLO XX DAC, issued in November 2018 and refinanced in April 2021, is a collateralised loan obligation (CLO) backed by a portfolio of mostly high-yield senior secured European loans. The portfolio is managed by Investcorp Credit Management EU Limited. The transaction's reinvestment period ended in April 2023. The rating upgrades on Class B-1-R, Class B-2-R, Class C-R and Class D-R notes are primarily a result of the deleveraging of the senior notes following amortisation of the underlying portfolio since the last rating action in Mar 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 affirmations on the ratings on the Class A-R, Class E and Class F 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. The Class A-R notes have paid down by approximately EUR9.5 million (3.9%) in the last 12 months. As a result of the deleveraging, over-collateralisation (OC) has increased across the capital structure. According to the trustee report dated February 2024 [1] the Class A/B, Class C, Class D and Class E OC ratios are reported at 139.9%, 127.3%, 119.2% and 111.0% compared to February 2023 [2] levels of 138.17%, 119.28%, 112.91% and 106.49%, respectively. In light of reinvestment restrictions during the amortisation period, and therefore the limited ability to effect significant changes to the current collateral pool, Moody's analysed the deal assuming a higher likelihood that the collateral pool characteristics would maintain an adequate buffer relative to certain covenant requirements. In particular, Moody's assumed that the deal will benefit from a shorter amortisation profile than it had assumed at the last rating action in March 2023. 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: EUR385,789,480 Defaulted Securities: EUR3,731,827 Diversity Score: 64 Weighted Average Rating Factor (WARF): 2998 Weighted Average Life (WAL): 4.07 years Weighted Average Spread (WAS) (before accounting for Euribor floors): 3.94% Weighted Average Coupon (WAC): 4.31% Weighted Average Recovery Rate (WARR): 44.16% Par haircut in OC tests and interest diversion test: - 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. 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 and swap providers, 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. 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. 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. ROCKFORD TOWER 2018-1: S&P Assigns B- (sf) Rating to F-R Notes -------------------------------------------------------------- S&P Global Ratings assigned its credit ratings to Rockford Tower Europe CLO 2018-1 DAC's 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 subordinated notes. This transaction is a reset of the already existing transaction. The existing classes of notes were fully redeemed with the proceeds from the issuance of the replacement notes on the reset date. The ratings reflect S&P's assessment of: -- The diversified collateral pool, which primarily comprises broadly syndicated speculative-grade senior-secured term loans and bonds that are governed by collateral quality tests. -- The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization. -- The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading. -- The transaction's legal structure, which is bankruptcy remote. -- The transaction's counterparty risks, which S&P is in line with its counterparty rating framework. Portfolio benchmarks CURRENT S&P weighted-average rating factor 2,832.73 Default rate dispersion 710.36 Weighted-average life (years) 3.94 Obligor diversity measure 114.50 Industry diversity measure 25.86 Regional diversity measure 1.48 Transaction key metrics CURRENT Portfolio weighted-average rating derived from S&P's CDO evaluator B 'CCC' category rated assets (%) 3.42 Actual 'AAA' weighted-average recovery (%) 37.80 Actual weighted-average spread (%) 3.93 Actual weighted-average coupon (%) 3.39 Under the transaction documents, the rated notes will pay quarterly interest unless a frequency switch event occurs. Following this, the notes will switch to semiannual payments. The portfolio's reinvestment period will end approximately 2.05 years after closing. The portfolio is well-diversified, primarily comprising broadly syndicated speculative-grade senior-secured term loans and senior-secured bonds. Therefore, S&P has conducted its credit and cash flow analysis by applying our criteria for corporate cash flow CDOs. S&P said, "In our cash flow analysis, we used the EUR400 million target par amount, and the portfolio's covenanted weighted-average spread (3.93%), covenanted weighted-average coupon (4.75%), and covenanted weighted-average recovery rates at each rating level. 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. "Until the end of the reinvestment period on April 24, 2026, the collateral manager may substitute assets in the portfolio for so long as our CDO Monitor test is maintained or improved in relation to the initial ratings on the notes. This test looks at the total amount of losses that the transaction can sustain as established by the initial cash flows for each rating, and it compares that with the current portfolio's default potential plus par losses to date. As a result, until the end of the reinvestment period, the collateral manager may through trading deteriorate the transaction's current risk profile, as long as the initial ratings are maintained. "Under our structured finance sovereign risk criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned ratings. "The transaction's documented counterparty replacement and remedy mechanisms adequately mitigate its exposure to counterparty risk under our current counterparty criteria. "The transaction's legal structure and framework is bankruptcy remote, in line with our legal criteria. "Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our rating is commensurate with the available credit enhancement for the class A-R, B-1-R, B-2-R, C-R, D-R, E-R, and F-R notes. "Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1-R, B-2-R, C-R, and D-R notes could withstand stresses commensurate with higher ratings than those we have assigned. However, as the CLO will be in its reinvestment phase starting from closing, during which the transaction's credit risk profile could deteriorate, we have capped our ratings assigned to the notes. "For the class F-R notes, our credit and cash flow analysis indicates that the available credit enhancement could withstand stresses commensurate with a lower rating. However, we have applied our 'CCC' rating criteria, resulting in a 'B- (sf)' rating on this class of notes." The ratings uplift for the class F-R notes reflects several key factors, including: -- The class F-R notes' available credit enhancement, which is in the same range as that of other CLOs we have rated and that have recently been issued in Europe. -- The portfolio's average credit quality, which is similar to other recent CLOs. -- S&P's model generated break-even default rate at the 'B-' rating level of 19.20% (for a portfolio with a weighted-average life of 3.94 years), versus if it was to consider a long-term sustainable default rate of 3.1% for 3.94 years, which would result in a target default rate of 12.21%. -- S&P does not believe that there is a one-in-two chance of this note defaulting. -- S&P does not envision this tranche defaulting in the next 12-18 months. -- Following this analysis, S&P considers that the available credit enhancement for the class F-R notes is commensurate with the assigned 'B- (sf)' rating. -- In addition to its standard analysis, S&P has also included the sensitivity of the ratings on the class A-R to E-R notes based on four hypothetical scenarios. S&P said, "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." The transaction securitizes a portfolio of primarily senior-secured leveraged loans and bonds, and is managed by Rockford Tower Capital Management LLC. Ratings list AMOUNT CREDIT CLASS RATING* (MIL. EUR) INTEREST RATE§ ENHANCEMENT (%) A-R AAA (sf) 248.00 3mE + 1.37% 38.00 B-1-R AA (sf) 37.00 3mE + 2.10% 27.50 B-2-R AA (sf) 5.00 5.75% 27.50 C-R A (sf) 26.40 3mE + 3.00% 20.90 D-R BBB- (sf) 26.60 3mE + 4.30% 14.25 E-R BB- (sf) 17.00 3mE + 6.60% 10.00 F-R B- (sf) 12.00 3mE + 8.30% 7.00 Sub notes NR 38.70 N/A N/A *The ratings assigned to the 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 6mE when a frequency switch event occurs. NR--Not rated. N/A--Not applicable. 3mE--Three-month Euro Interbank Offered Rate. SIGNAL HARMONIC II: S&P Assigns B- (sf) Rating to Class F Notes --------------------------------------------------------------- S&P Global Ratings assigned its credit ratings to Signal Harmonic CLO II DAC's class A, B-1, B-2, C, D, E, and F notes. At closing, the issuer also issued unrated subordinated notes. The reinvestment period will be 4.53 years, while the non-call period will be 2.00 years after closing. Under the transaction documents, the rated loans and notes will pay quarterly interest unless there is a frequency switch event. Following this, the notes will switch to semiannual payment. The ratings assigned to the notes reflect S&P's assessment of: -- The diversified collateral pool, which primarily comprises broadly syndicated speculative-grade senior secured term loans and bonds that are governed by collateral quality tests. -- The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization. -- The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading. -- The transaction's legal structure, which is bankruptcy remote. -- The transaction's counterparty risks, which are in line with S&P's counterparty rating framework. Portfolio benchmarks CURRENT S&P Global Ratings weighted-average rating factor 2,861.57 Default rate dispersion 480.76 Weighted-average life (years) 4.81 Obligor diversity measure 97.23 Industry diversity measure 22.41 Regional diversity measure 1.26 Transaction key metrics CURRENT Total par amount (mil. EUR) 440.00 Defaulted assets (mil. EUR) 0.00 Number of performing obligors 111 Portfolio weighted-average rating derived from S&P's CDO evaluator B 'CCC' category rated assets (%) 0.90 Actual 'AAA' weighted-average recovery (%) 37.81 Actual weighted-average spread (%) 4.37 Actual weighted-average coupon (%) N/A N/A--Not applicable. 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 is well-diversified on the closing date, primarily comprising 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 also modeled the covenanted weighted-average spread of 4.25%, and the covenanted weighted-average recovery rates as indicated by the collateral manager. 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 current counterparty criteria. "Following the application of 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 legal structure and framework is bankruptcy remote. The issuer is a special-purpose entity that meets our criteria for bankruptcy remoteness. "Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1 to E notes could withstand stresses commensurate with higher ratings than those we have assigned. However, as the CLO will be in its reinvestment phase starting from the effective date, during which the transaction's credit risk profile could deteriorate, we have capped our ratings assigned to the notes. The class A and F notes can withstand stresses commensurate with the assigned ratings. "In our view, the portfolio is granular in nature, and well-diversified across obligors, industries, and asset characteristics when compared with other CLO transactions we have rated recently. As such, we have not applied any additional scenario and sensitivity analysis when assigning our ratings to any classes of notes in this transaction. "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 to F notes. "In addition to our standard analysis, 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." Ratings AMOUNT CLASS RATING* (MIL. EUR) SUB (%) INTEREST RATE§ A AAA (sf) 272.80 38.00 Three/six-month EURIBOR plus 1.70% B-1 AA (sf) 43.56 27.00 Three/six-month EURIBOR plus 2.60% B-2 AA (sf) 4.84 27.00 5.75% C A (sf) 26.40 21.00 Three/six-month EURIBOR plus 3.40% D BBB- (sf) 28.60 14.50 Three/six-month EURIBOR plus 4.70% E BB- (sf) 19.80 10.00 Three/six-month EURIBOR plus 6.93% F B- (sf) 13.20 7.00 Three/six-month EURIBOR plus 8.39% Sub NR 40.80 N/A N/A *The ratings assigned to the class A, B-1, and B-2 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. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. N/A--Not applicable. =================== L U X E M B O U R G =================== ARDAGH GROUP: S&P Cuts ICR to 'B-' on Prolonged Operating Weakness ------------------------------------------------------------------ S&P Global Ratings lowered its long-term issuer credit ratings on Luxembourg-based metal and glass packaging producer Ardagh Group S.A. to 'B-' from 'B'. S&P also lowered its issue ratings on Ardagh's senior secured debt to 'B-' from 'B+', its unsecured notes to 'CCC' from 'CCC+', the deeply subordinated $1.7 billion toggle notes issued by ARD Finance S.A. to 'CCC' from 'CCC+', the senior secured notes issued by Ardagh Metal Packaging (AMP) to 'B+' from 'BB-', and AMP's senior unsecured notes to 'B-' from 'B'. The negative outlook reflects the risk the capital structure could become unsustainable if the group continues to burn cash, struggles to refinance its very high debt stock, or considers restructuring options such as a distressed debt exchange. S&P said, "We revised our business risk assessment down to fair from satisfactory based on weak operational performance. Ardagh incurred material growth capex in the past few years, primarily as it expanded its metal can production capacity. Together with other factors (such as a high interest burden and weaker volumes), this undermined FOCF. These new metal plants' usage was much lower than expected as customers adjusted their orders to match weaker demand. In 2023, this, combined with lower demand for glass packaging in Europe and for a major beer brand (one of Ardagh's main glass packaging customers in the U.S.), led to materially lower EBITDA than expected. The company partly addressed this via temporary and permanent capacity closures and restructuring initiatives. Although we acknowledge Ardagh's large size, leading market positions, and blue-chip customer relations, its weaking EBITDA margins (down to 11.3% in 2023 from 13.2% in 2022, 15.6% in 2021, and over 16% in 2020 and 2019) are unlikely to improve materially in the near term, which led us to revise our business risk assessment. "We expect negative FOCF for 2024 and 2025 and forecast no material improvement in the next few years. Ardagh generated negative adjusted FOCF in the past few years and positive adjusted FOCF is unlikely in the next three years as EBITDA improvements and capex reductions will likely be offset by rising interest expense (assuming a successful refinancing of the notes due in April 2025 and August 2026). We continue to view the group's FOCF as insufficient compared to total adjusted debt exceeding $12.8 billion." The successful refinancing of its upcoming debt maturities relies on a positive market sentiment. The group faces substantial debt maturities in April 2025 ($700 million) and August 2026 ($2.57 billion). Given the lack of positive FOCF, weak demand, and high interest rates, S&P thinks the notes' refinancing is uncertain. Absent positive developments in the coming months, the capital structure could become unsustainable in its view, which would prompt a downgrade to the 'CCC' category. S&P's credit assessment continues to include a negative comparable ratings analysis (CRA). Its negative CRA reflects the group's very high leverage and the sizable medium debt maturities. The negative outlook reflects the risk the capital structure could become unsustainable if the group continues to burn cash, Ardagh struggles to refinance its debt, or it starts considering debt restructuring options such as a distressed exchange. S&P could lower its issuer credit rating on Ardagh in the next 6-12 months to the 'CCC' category if: -- S&P thinks there is an increasing risk of the group not being able to refinance its upcoming debt maturities at an affordable price, because this will raise the risk of a debt restructuring; and -- EBITDA margins or FOCF failed to improve materially. S&P could revise its outlook to stable if: -- The group refinances its upcoming notes; and -- S&P foresees a material improvement in adjusted sustainable FOCF. This will most likely include a recovery in EBITDA margins closer to their historical levels. S&P said, "ESG factors are an overall neutral consideration in our credit rating analysis of Ardagh. The company's exposure to environmental and social risks is comparable with that of industry peers. The group continually seeks to improve its environmental performance through emissions reduction, maximizing the use of recycled content, minimizing raw material, energy consumption, and material waste, and optimizing logistics. Although neither glass nor metal are biodegradable, both can be recycled infinitely without quality loss (unlike paper and plastics). Ardagh will likely benefit from the increased substitution of plastic with other packaging substrates." ARVOS LUXCO: S&P Lowers ICR to 'D' on Distressed Exchange --------------------------------------------------------- S&P Global Ratings lowered to 'D' (default) from 'CC' its issuer credit rating on industrial heat exchange solutions provider Arvos LuxCo S.a.r.l., as well as our issue ratings on the EUR28 million revolving credit facility (RCF), and the 414 million euro- and dollar- equivalent fist-lien term debt. S&P said, "We lowered our ratings after the U.K. court's decision to sanction the scheme of arrangement between Arvos LuxCo and its scheme creditors to implement the proposed debt restructuring transaction. As part of the debt restructuring, the group has incorporated a new holding company and holding structure. "We view the exchange offer as tantamount to a default because investors will receive less value than the promise of the original securities, and because the offer is distressed rather than opportunistic. We assess the capital structure so far as unsustainable and liquidity as deteriorating, given the inability to generate free operating cash flow after tax and interest." In S&P's view, the transaction offers less than the original promise because: -- Part of the existing first-lien lenders at operating group level will be completely wiped out and will receive less than originally promised since they are being exchanged for equity. -- Part of the existing first-lien lenders at operating group level that are being hived-up to the new holding company level will be subordinated to the first-lien debt remaining at the operating group level, which represents an alteration of their ranking. -- Accrued payment-in-kind (PIK) margin on the restated term loan B (TLB) has been waived. -- Maturity of the original first-lien facilities will be extended by three years to 2027. Debt restructuring at the operating group level consists of: -- The existing EUR414 million first-lien TLB will be partially reinstated at the operating group level. -- Accordingly, EUR345 million of existing first-lien debt, consisting of EUR205 million of term loan, EUR112 of ancillary facility, and EUR28 million of RCF will be reinstated at the operating group level. -- The maturity of the term of the EUR205 million term loan will be extended by three years to August 2027, and the maturities of the ancillary facility and the RCF will be extended also by three years to May 2027. -- On the restated TLB, the PIK margin is going to be deleted without replacement and the accrued PIK waived. Debt restructuring at the new holding company level consists of: -- EUR30 million out of the existing EUR414 million first-lien debt will be reinstated at the new holding company level. The maturity will automatically extend by three months beyond the maturity date of the restated EUR205 million TLB. The provision ensures that the maturity date always remains three months after the maturity of the date of the restated TLB. -- The holding company will pay a fixed cash interest of 0.5% per year, payable quarterly. -- The remaining EUR179 million out of the existing EUR414 million first-lien term loan will be exchanged fully for equity. S&P intends to re-evaluate its rating on Arvos LuxCo following the restructuring, taking into account its forward-looking view of the group's revised capital structure. =========== R U S S I A =========== IPOTEKA BANK: S&P Affirms 'BB-/B' ICRs, Outlook Stable ------------------------------------------------------ S&P Global Ratings affirmed its 'BB-/B' long- and short-term issuer credit ratings on Ipoteka Bank. The outlook is stable. S&P also affirmed the issue credit rating on the bank's senior unsecured debt at 'BB-'. Ipoteka's legacy corporate loan portfolio could require further provisioning. The portfolio's performance has worsened in the last 12 months, particularly as the agricultural sector suffered from an abnormally cold winter in Uzbekistan in 2022-2023. This increased Ipoteka's share of Stage 3 loans in its total loan book to about 19%, which is 2x-3x our estimate for the sector average. S&P said, "In our view, the resolution of Ipoteka's nonperforming loans (NPLs) could be protracted and require additional resources. We see a risk of further deterioration in Ipoteka's asset quality indicators given its substantial Stage 2 loans, which could become Stage 3 while legacy loans mature. We therefore revised down our assessment of its risk position and subsequently its SACP to 'b+' from 'bb-'." OTP could provide some additional capital support to Ipoteka if needed. In December 2023 OTP provided US$70 million (UZS845 billion) in capital support to Ipoteka, which increased OTP's share in Ipoteka's equity to 79.6%. It partially balanced the negative impact of extensive provisioning on Ipoteka's capital, but not fully. As a result, the decline in Ipoteka's risk-adjusted capital (RAC) ratio was less marked than it could have been without OTP's support. Ipoteka's RAC ratio decreased to about 7.5% at end-2023 (estimate based on financials under local accounting standards) from 10.1% the year before. At this stage S&P still view Ipoteka's capital buffer as sufficient and expect it to remain 7.5%-7.8% in 2024. S&P said, "Our base case is for moderate loan growth of 13%-15%, no material asset quality deterioration, and cost of risk normalizing at around 2.5% over the next year from more than 10% anticipated for 2023. Given Ipoteka's ongoing integration into the group and OTP's commitment to support its subsidiary, we now include one notch of support in our rating on Ipoteka. We also expect that its integration with the group could improve Ipoteka's governance standards and risk practices once completed. "Ambitious lending growth could further weigh on Ipoteka's capitalization. We think planned asset growth will be manageable and lead to sustainable internal capital generation capacity. As well as developing mortgage lending--an area in which Ipoteka has historically performed well--the bank plans to grow its unsecured retail lending. This carries higher risk weights in our capitalization model than we apply to mortgages. We expect Ipoteka will benefit from OTP's expertise in retail banking, which should ensure healthy loan book growth. We could revise our views, specifically of Ipoteka's capitalization prospects, if its loan book growth is faster than expected or if it encounters a substantial rise in funding costs. This is not our base case, however. "We view the risk of an abrupt outflow of government funding as low despite Ipoteka's privatization. The Uzbekistani government holds 45% of Ipoteka's deposits as of Jan. 1, 2024, which we consider a concentration risk. Most government funding is for government-subsidized mortgage programs maturing beyond 2028. Ipoteka was the first meaningful privatization in the country's banking sector and we expect the government would be mindful of potential reputational risks when considering any significant changes to the allocation of its funds in the sector. However, we anticipate a gradual decrease in the share of government funding as Ipoteka will develop commercial lending and will probably attract market finance, benefiting from OTP's help. "The stable outlook on Ipoteka reflects our expectation that the bank will curb its asset quality deterioration over the next 12 months while maintaining adequate capital and stable funding, and remain the leading mortgage bank in Uzbekistan." S&P could take a negative rating action on Ipoteka over the next 12 months if it sees a decline in its RAC ratio to below 7%. Specifically, S&P could consider a downgrade if: -- There is a further material asset quality deterioration requiring significant new provisioning that is not offset by either internal capital generation or sufficient capital support from OTP; -- Contrary to our expectations, loan book growth materially outpaces internal capital generation capacity; or -- S&P sees heightened banking sector risks in Uzbekistan. S&P could also lower the ratings if it took a similar action on Uzbekistan. A positive rating action on Ipoteka is unlikely, in S&P's view. It would hinge on a positive rating action on the sovereign and the working out of Ipoteka's problem loans. An upgrade would also require manageable loan book growth from a capitalization perspective, and a stable funding profile. IPOTEKA-BANK: Fitch Affirms 'BB-' LongTerm IDR, Outlook Stable -------------------------------------------------------------- Fitch Ratings has affirmed Joint-Stock Commercial Mortgage Bank Ipoteka-Bank's (Ipoteka) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-' with Stable Outlooks. The bank's Viability Rating (VR) has been affirmed at 'b'. KEY RATING DRIVERS Ipoteka's Long-Term IDRs are based on potential support from its parent bank, OTP Bank Plc (OTP), as captured by its 'bb-' Shareholder Support Rating (SSR). This view reflects OTP's majority ownership, high reputational risks for OTP from a subsidiary's default, and the low cost of support for the parent. The bank's 'b' VR reflects recovering profitability, modest capitalisation, high potentially impaired loans and reliance on wholesale funding. These weaknesses are balanced by improving governance quality and lower-than-average risk appetite and dollarisation. IDRs Capped by Country Ceiling: The bank's SSR and Long-Term Foreign-Currency IDR are constrained by Uzbekistan's 'BB-' Country Ceiling, which captures transfer and convertibility risks and the risk that the subsidiary may not be able to benefit from parent support to service its own foreign-currency obligations. State-Dominated Economy, Structural Weaknesses: Uzbekistan's economy remains heavily dominated by the state despite recent market reforms and privatisation plans, resulting in weak governance and generally poor financial transparency. Additional risks stem from high dollarisation and concentrations of the banking sector and reliance on state and external wholesale debt. Main Mortgage Bank, Commercial Focus: Ipoteka is the fifth-largest bank in Uzbekistan, with leading positions in mortgage lending (end-2023: 25% of sector mortgages). The bank develops its commercial lending, although legacy subsidised exposures made up a sizeable 29% of gross loans at end-2023. Fitch expects improvements in governance quality and strategy execution under OTP's umbrella, which should bolster the bank's business profile in the medium term. Strengthening Risk-Management Framework: Post-acquisition, Ipoteka has started aligning its risk-management framework with OTP's. Fitch believes this should improve provisioning and the quality of new loans in the medium term, making the bank less exposed to seasoning risks. The bank's FX-adjusted loan book growth was a modest 11% in 2023 (sector average: 16%) and Fitch expects it to remain subdued in 2024, due to modest capital buffer. Loan dollarisation (end-2023: 28%) remained well below the sector average of 45%. High Impaired Loans; Good Coverage: Ipoteka's impaired loans increased to 10.1% of gross loans at end-1H23 (end-2022: 9.2%), while Stage 2 loans doubled in size (end-1H23: 19% of gross loans). This was driven by the corporate and SME loan book seasoning and the adoption of OTP's stricter loan classification criteria. The latter resulted in higher reserve coverage ratio 114% at end-1H23 (end-2022: 74%). Fitch estimates the impaired loans ratio could have increased further to about 19% by end-2023, before reducing moderately in 2024, due to recoveries and loan growth. Provisioning Costs Drive Losses: The bank reported a UZS586 billion (equivalent of USD51 million or 10% of opening equity) net loss in 1H23, driven by very high loan impairment charges (9.1% of average gross loans; annualised) and Fitch expects the loss to have further widened in 2H23. However, Fitch expects Ipoteka to recognise most of provisioning costs in 2023, leading to a rebound of performance in 2024, underpinned by its healthy margins. Injection Supports Capitalisation: Ipoteka's Fitch Core Capital (FCC) ratio reduced to 14.1% at end-1H23 (end-2022: 16.6%), reflecting net loss. Fitch estimates the bank's capital buffer could have depleted further in 2H23, despite a UZS845 billion capital contribution by OTP in 4Q23. Fitch expects Ipoteka's capitalisation to improve in 2024, supported by full profit retention and the planned conversion of International Finance Corporation's USD35 million loan into the bank's common equity. State Funding Prevails; Reasonable Liquidity: State-related funds (including deposits and loans for financing subsidised mortgages) remains the core source post privatisation, comprising 45% of total liabilities at end-2023. Market borrowings added another 27%. The liquidity buffer was adequate (end-2023: 12% of total assets) and covered non-state deposits by 60%, while the bank can rely on OTP to obtain liquidity, if needed. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Ipoteka's support-driven IDRs could be downgraded following a downgrade of Uzbekistan's Country Ceiling or if Fitch's assessment of OTP's ability or propensity to provide support to the subsidiary substantially weakens. The VR could be downgraded on further deterioration of the bank's asset quality, leading to the continued loss-making performance and the FCC ratio being sustainably below 10%. Pressure on capitalisation from rapid lending growth and aggressive dividend payments could also be credit negative, although Fitch does not consider this as baseline scenario. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade The IDRs could be upgraded if the Country Ceiling was upgraded, provided Fitch's view that ability or propensity of OTP to provide support to the subsidiary remains the same or improves. An upgrade of the bank's VR would require notable improvements in the Uzbek operating environment, along with a continued reduction in the bank's legacy asset-quality risks. The bank's VR could also be upgraded, following the sustainable record of superior asset quality and recovery of profitability to above historical average, amid strengthening of capitalisation. OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS Ipoteka's senior unsecured debt rating is in line with the bank's 'BB-' Long-Term Foreign-Currency IDR. The bank has issued a five-year US dollar-denominated Eurobond and a three-year soum-denominated Eurobond. Both issue ratings are anchored to Ipoteka's Long-Term Foreign-Currency IDR, as all settlements are in US dollars. For the soum-denominated issue, settlements are in US dollars at the exchange rate set by the Central Bank of Uzbekistan on each settlement date. The notes' ratings are in line with Ipoteka's Long-Term Foreign-Currency IDR, as they represent unconditional, senior unsecured obligations of the bank, which rank pari passu with its other senior unsecured obligations. OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES The bank's long-term debt rating is sensitive to changes to its Long-Term IDRs. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS Ipoteka's IDRs are driven by potential support from OTP. 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 Prior ----------- ------ ----- Joint-Stock Commercial Mortgage Bank Ipoteka-Bank LT IDR BB- Affirmed BB- ST IDR B Affirmed B LC LT IDR BB- Affirmed BB- LC ST IDR B Affirmed B Viability b Affirmed b Shareholder Support bb- Affirmed bb- senior unsecured LT BB- Affirmed BB- =========== S E R B I A =========== INDUSTRIJA STAKLA: Serbia to Auction Assets on May 17 ----------------------------------------------------- SeeNews reports that Serbia's Bankruptcy Supervision Agency said it is auctioning off local bankrupt glass maker Industrija Stakla Pancevo (ISP) at a starting price of RSD62.5 million (EUR$584,000/538,000). The agency said in a statement last week the company will be put up for sale at a public auction on May 17, SeeNews relates. According to SeeNews, interested buyers should pay a RSD25 million deposit and submit the necessary documents to participate in the auction by May 13, the statement read. The commercial court in the northern city of Pancevo opened bankruptcy proceedings against ISP in December 2015, SeeNews discloses. SERBIA: S&P Alters Outlook to Positive, Affirms 'BB+/B' SCRs ------------------------------------------------------------ On April 5, 2024, S&P Global Ratings revised its outlook on Serbia to positive from stable. At the same time, S&P affirmed the 'BB+/B' long- and short-term foreign and local currency sovereign credit ratings. The transfer and convertibility assessment is 'BBB-'. Outlook The positive outlook reflects Serbia's strong macroeconomic outcomes in 2023 and the possible further improvements in its external and fiscal performance. Upside scenario S&P could consider an upgrade in the next 12 months should Serbia's external position improve beyond its expectations on the back of stronger exports or net foreign direct investment (FDI) inflows. Additionally, stronger fiscal performance that helps lower net government debt could also lead to an upgrade. Downside scenario S&P might revise the outlook to stable if an economic slowdown in Serbia's key EU trading partners, potential energy supply shocks, or elevated geopolitical tensions markedly weakened Serbia's growth momentum and weighed on its fiscal and balance of payments positions. Rationale S&P's ratings on Serbia are supported by the country's strong growth and FDI prospects, moderate public debt levels, and credible macroeconomic policy framework. The ratings are constrained, however, by the country's relatively weak institutional framework, comparatively low GDP per capita, a still-sizable net external liability position, and high euroization in the economy. Institutional and economic profile: Serbia's GDP growth will accelerate in 2024 on strengthening domestic demand, and the medium-term growth prospects are solid -- The dissipating indirect effects of the Russia-Ukraine war lead us to anticipate a pick-up in Serbia's economic growth to an average 3.8% over 2024-2027. -- Despite the development of the Bulgaria-Serbia gas connector, Serbia's energy sector will continue to depend significantly on Russian gas, posing a potential vulnerability until gas supplies become more diversified. -- Serbia's journey toward EU membership will remain lengthy and complex, contingent upon the normalization of relations with Kosovo and broad adherence to EU sanctions against Russia. Despite a challenging external environment, Serbia's exports and economic growth have remained resilient and its macroeconomic and fiscal imbalances have reduced. S&P said, "We anticipate real GDP to expand by 3.3% in 2024, up from 2.5% in 2023, then average 3.8% in 2025-2027. Growth will be driven by increased household consumption thanks to easing inflation, strong wage increases, and looser financial conditions. Additionally, investment will contribute positively, supported by public infrastructure projects in energy and transportation sectors. However, we expect net exports to dent growth, primarily due to higher domestic consumer demand and increased imports associated with the acceleration of Serbia's investment cycle." S&P said, "Serbia has withstood past multiple shocks on the back of prudent macroeconomic management, supporting our view of the country's strong growth outlook for 2024-2027. In fact, we expect growth might accelerate should the ongoing private and public investment cycle further boost Serbia's productive capacity. "Although it's not our base-case scenario, Serbia's growth prospects could dim due to reduced external demand from key trading partners such as the EU, which receives about 65% of Serbia's exports." Additionally, Serbia's substantial reliance on Russian gas flows through the Balkan Stream Pipeline poses a risk. Nevertheless, efforts by the Serbian authorities to diversify gas import channels, such as the inauguration of the Bulgaria-Serbia gas interconnector in December 2023, will help partially mitigate this risk. As a result, Serbia will be able to import approximately 0.4 billion cubic meters of Azeri natural gas per year, out of roughly three billion cubic meters the country consumes per year. The December 2023 snap parliamentary elections resulted in the ruling Serbian Progressive Party (SNS) coalition clinching a majority with 48% of the vote and 129 seats--a notable increase of nine seats. Concurrently, the Serbia Against Violence coalition, the primary opposition, garnered 24% of the vote and 65 seats, gaining 25 seats. Although international observers acknowledged the elections for broadly allowing freedom of expression and assembly, the process also surfaced concerns about some electoral irregularities, such as the lack of clear separation between official functions and campaign activities. S&P expects a high degree of policy continuity, with the incoming government likely to advance reforms anchored by an ongoing program with the IMF. Apart from macroeconomic and fiscal targets, this IMF program focuses on structural weakness in the country's state-owned enterprises (SOEs), primarily in the energy sector. However, the ongoing centralization of the institutional framework and decision-making could undermine long-term policy predictability. This may erode investor confidence. Serbia's EU aspirations could improve checks and balances between Serbian institutions, but the accession process will likely be lengthy and complex. Progress has been slow since the country gained EU candidate status in 2012. Only two out of the 35 chapters of the Acquis Communautaire have been provisionally closed so far, highlighting the extensive work that still lies ahead. Serbia faces hurdles common among other EU candidate countries, like improving the rule of law. But Serbia also grapples with unique challenges, notably the need to normalize relations with Kosovo and to align with EU foreign policy on Russia. Serbia and Kosovo have made limited progress regarding the Ohrid Agreement, verbally agreed upon in March 2023. The agreement encompasses mutual recognition of documents, establishment of permanent missions, restrictions on international representation, and the formation of an ethnic Serb-dominated municipality association in Northern Kosovo. However, the formal signing of the Ohrid agreement appears unlikely in the short term amid still-heightened tensions. The strain surfaced in recent disagreements over the use of the Serbian dinar in Kosovo, primarily utilized by Serbians in Northern Kosovo, but opposed by the Kosovan government. The EU also highlights Serbia's hesitance to align with EU sanctions against Russia as another obstacle to its accession. Serbia's dependence on Russian natural gas compounds this challenge, despite ongoing attempts to diversify its energy supply. Flexibility and performance profile: Fiscal and external financing risks stemming from the Russia-Ukraine war have eased considerably in recent months -- The Serbian government's commitment to fiscal consolidation prompts us to anticipate a slight narrowing of the fiscal deficit to 2.1% of GDP in 2024 from 2.2% in 2023. -- S&P assumes the current account deficit will expand to 3.9% of GDP in 2024 from 2.6%, due to high domestic demand and an increase in investment-related imports. -- FDI inflows will continue covering the current account deficit, helping to keep the central bank's foreign exchange reserves reasonably high. S&P expects the Serbian government's adherence to conservative fiscal management to continue and general government deficits to remain low. Additionally, the budget aligns with targets set under the ongoing IMF Stand-By Arrangement (SBA) program. S&P said, "Despite ambitious public investment targets, we think there is potential for some slight overperformance compared with the government deficit target of 2.2% of GDP in 2024. Our fiscal projections for 2024-2027 rest on our assumptions that nominal GDP growth will support revenue, allowing the authorities to accommodate increased spending toward higher public sector wages and pensions, as well as infrastructure spending. We also factor in the discontinuation of liquidity support for SOEs in the energy sector following energy tariff adjustments over the last two years." Previously, SOEs such as Srbijagas and Elektroprivreda Srbije received liquidity support to mitigate financial losses linked to the energy price shock started by the Russia-Ukraine war. This prompted the government to initiate reforms aimed at improving their profitability and governance, easing liquidity pressures in the sector. In line with previous years, the government intends to finance the deficit through a combination of international and domestic sources, including its substantial liquid cash buffers equivalent to roughly 10% of GDP. The government remains committed to its path of fiscal consolidation, guided by a new fiscal rule due to become effective from 2025 onward. This rule aims to achieve a budget deficit of a maximum of 1.5% of GDP in 2026 and maintain public debt at or below 50% of GDP. S&P said, "We project that the fiscal deficit will average 1.7% of GDP over 2025-2027. Based on our projected fiscal and macroeconomic outlook, general government debt levels net of liquid assets will stabilize at around a moderate 40% of GDP in the coming two years." While Serbia's debt levels are moderate compared with those of its peers, it stands out that over 70% of the Serbian government's debt is denominated in foreign currency, exposing it to exchange rate volatility. However, the stability of the dinar and euro/U.S. dollar hedges in place help to mitigate this risk. S&P said, "Increased consumer demand and higher investment-related imports lead us to anticipate a deterioration in the trade balance this year, thereby widening the current account deficit to 3.8% of GDP from 2.6% last year. We expect the current account deficit to average 4.2% of GDP between 2025-2027, but project it will be largely financed by net FDI inflows, which have played a significant role in expanding and diversifying Serbia's export base while reducing external debt in the past decade. These inflows have also bolstered the National Bank of Serbia's (NBS') foreign exchange reserves, which have increased by 17% to EUR27.9 billion ($30.0 billion; amounting to five months of current account payment cover) in the 12 months ended February 2024, and we expect reserves to remain broadly stable over the coming few years." Inflation has continued to decelerate on the back of easing food, energy, and service prices; it reached 5.6% in February 2024, from 16.1% a year earlier. Similarly, core inflation has slowly been trending down, reaching 5.2% in February. S&P said, "Considering base effects, declining global commodity prices, a relatively stable exchange rate against the euro, and past monetary tightening, we expect both headline and core inflation to converge to the NBS' target tolerance band of 3.0% plus or minus 1.5% in the second half of 2024. In annual average terms, we project headline inflation to decline to 5.2% this year from 12.1% in 2023. Continued disinflation will likely spark the policy easing cycle in the second half of 2024." S&P thinks financial stability risks will remain low. Serbia's banking system is well capitalized, profitable, and liquid. At end-2023, the system's Regulatory Tier 1 capital to risk-weighted assets was 19.7%, while the nonperforming loans ratio remained at a historical low of 3.2% of total assets. That said, high euroization persists, with euro-denominated deposits and loans accounting for more than 50% of total stocks. This poses challenges due to the potential vulnerability to exchange rate fluctuations, yet it remains contained by the central bank's commitment to exchange rate stability. Overall, however, the risks of contingent fiscal liabilities from the sector are contained. In accordance with S&P's relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable. At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action. Ratings List OUTLOOK ACTION; RATINGS AFFIRMED TO FROM SERBIA Sovereign Credit Rating BB+/Positive/B BB+/Stable/B Transfer & Convertibility Assessment BBB- BBB- Senior Unsecured BB+ BB+ ========= S P A I N ========= TDA CAM 8: Moody's Ups Rating on EUR45.9MM Class B Notes to Ba3 --------------------------------------------------------------- Moody's Ratings has upgraded the ratings of 2 notes in TDA CAM 8, FTA. The rating action reflects the increased levels of credit enhancement for the affected notes, and revision of key collateral assumptions. Moody's affirmed the rating of the notes that had sufficient credit enhancement to maintain their current rating. EUR1635.4M Class A Notes, Affirmed Aa1 (sf); previously on Feb 2, 2022 Affirmed Aa1 (sf) EUR45.9M Class B Notes, Upgraded to Ba3 (sf); previously on Feb 2, 2022 Affirmed B2 (sf) EUR18.7M Class C Notes, Upgraded to Caa1 (sf); previously on Feb 2, 2022 Upgraded to Caa2 (sf) A comprehensive review of all credit ratings for the transaction has been conducted during a rating committee. RATINGS RATIONALE The rating action is prompted by an increase in credit enhancement for the affected tranches and revision of key collateral assumptions. Increase in Available Credit Enhancement: Significant recoveries and thin excess spread via Spanish swap led to the full funding of the reserve fund, thus increasing the credit enhancement available in this transaction, despite pro rata amortisation. In the case of Classes B and C, the credit enhancement increased to 8.80% and 4.01% from 7.52% and 2.73% respectively since the last rating action on these notes. Risk of interest shortfall: The interest of Class B and C notes remains subordinated to PDL given the interest deferral triggers have been hit, however reserve fund is available to pay subordinated interest for Classes B and C. Due to the relatively thin excess spread and the uncertainties on future recoveries inflow, the two notes will continue to be at risk of future interest shortfall given the position in the waterfall. Revision of Key Collateral Assumptions: As part of the rating action, Moody's reassessed its lifetime loss expectation for the portfolio reflecting the collateral performance to date. The performance of the transaction has continued to be stable since one year ago. Total delinquencies have marginally increased in the past year, with 90 days plus arrears currently standing at 0.52% of current pool balance compared to 0.46% of current pool balance one year ago. Cumulative defaults currently stand at 10.97% of original pool balance up from 10.92% a year earlier. Moody's maintained the expected loss assumption at 2.9% as a percentage of current pool balance due to stable performance. The revised expected loss assumption corresponds to 5.75% as a percentage of original pool balance, down from 5.77%. Moody's has also assessed loan-by-loan information as a part of its detailed transaction review to determine the credit support consistent with target rating levels and the volatility of future losses. As a result, Moody's has maintained the MILAN Stressed Loss assumption at 9.2%. Available credit enhancement for Class D remains commensurate with the current rating to cover modelled projected losses as well as credit risk from other relevant qualitative considerations. Methodology Underlying the Analysis: The principal methodology used in these ratings was "Residential Mortgage-Backed Securitizations methodology" published in October 2023. The analysis undertaken by Moody's at the initial assignment of ratings for an RMBS security may focus on aspects that become less relevant or typically remain unchanged during the surveillance stage. Please see "Residential Mortgage-Backed Securitizations methodology" for further information on Moody's analysis at the initial rating assignment and the on-going surveillance in RMBS. 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 and (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. =========================== U N I T E D K I N G D O M =========================== CARLTON FOREST: Blames Collapse on Industry, Economic Headwinds --------------------------------------------------------------- Carol Millett at MotorTransport reports that Worksop-based transport and warehousing firm Carlton Forest 3PL has gone into administration, along with subsidiary Green Forest Solutions LLP and Carlton Forest Group Holdings, after battling rising costs, falling storage rates and overcapacity in the warehousing market. James Lumb and Howard Smith of Interpath Advisory have been appointed as joint administrators to all three companies, MotorTransport relates. According to MotorTransport, in a statement the joint administrators said: "In recent times, and in common with a number of other companies operating in the third-party logistics sector, Carlton Forest 3PL had been battling industry and wider economic headwinds, including rising costs, significant excess warehouse capacity in the market and decreasing storage rates. "With pressure on the company's cashflow increasing, the directors sought to undertake a review of their options, including sale and investment options. However, when a solvent solution could not be found, they took the difficult decision to seek the appointment of administrators." "We are seeing a lot of businesses in UK logistics which are facing similar issues to Carlton Forest, driven by new warehouse capacity hitting the market over recent years, and the general destocking of the UK consumer economy as Covid-related supply chain disruption has subsided," MotorTransport quotes James Lumb, MD at Interpath Advisory and joint administrator, as saying. "Carlton Forest, like many of its peers in the market, had grown to meet demand and this has had the effect of increasing its overheads. Unfortunately, however, the race to the bottom on pricing and the loss of a key customer ultimately contributed to Carlton Forest's inability to keep trading. "Our immediate priority has been to work with employees, suppliers and customers to repatriate stock as quickly as possible, minimising disruption to customers as best we can." In its most recent annual results for the year to August 31, 2022, Carlton Forest Group Holdings reported a doubling of turnover of GBP2.1 million, up from GBP1 million the year before, while pre-tax profit rose to GBP115,839 (2021: GBP86,061), MotorTransport discloses. GOLD RUSH: S&P Assigns Preliminary 'B' Rating, Outlook Stable ------------------------------------------------------------- S&P Global Ratings assigned its 'B' preliminary rating to Gold Rush Bidco Ltd., the new parent of U.K.-based independent content producer DLG Acquisitions Ltd. (All3Media). At the same time, S&P assigned its 'B' preliminary rating and '3' preliminary recovery rating to the proposed senior secured term loan. The '3' preliminary recovery rating indicates our expectation for meaningful (50%-70%) recovery in the event of a default. S&P expects to withdraw its ratings on DLG Acquisitions Ltd. and its debt once the proposed transaction closes. The stable outlook indicates that, over the next 12 months, All3Media's revenue and EBITDA will increase due to the ramp up in production, leading to FOCF to debt comfortably above 5% and adjusted leverage of around 7.0x in 2024, falling below 6.0x afterward. S&P said, "The 'B' rating and stable outlook on All3Media reflects our expectation that its leverage will decline and it will generate sustainable positive FOCF in 2024-2025, supported by EBITDA expansion. On Feb. 16, 2024, RedBird IMI, a joint venture between private equity company RedBird Capital Partners and International Media Investments (IMI), announced it had agreed to acquire All3Media from Warner Bros Discovery and Liberty Global for GBP1.15 billion. It will finance the acquisition with GBP675 million equity and with EUR500 million (equivalent to GBP430 million) senior secured term loan B (TLB) issued by All3Media's new parent, Gold Rush Bidco Ltd. "We expect that in 2024-2025, All3Media's revenue and EBITDA will steadily increase due to a ramp up in production and deliveries of its high-quality scripted and non-scripted shows and growing distribution and digital revenue, despite the intense competition and challenging conditions in the content production industry. "The company's and its new owner's focus on operational cost efficiency and free cash flow generation should support deleveraging and the company's ability to self-fund the upcoming earnout payments over the forecast period. We forecast All3Media's S&P Global Ratings-adjusted leverage will be about 7.0x in 2024 and improve below 6.0x in 2025, compared with 7.5x in 2023. The company will also benefit from an enhanced liquidity position at transaction closing with about 110 million cash (including company and production cash) on balance and a fully undrawn GBP45 million revolving credit facility (RCF). "We expect demand for All3Media's content to remain robust despite lower growth expectations in the industry. In our view, operating conditions in the content production industry will remain difficult over the coming one to two years as the global media ecosystem continues to adjust to rapidly declining linear TV viewing and the shift to digital content distribution. We expect more cautious spending and tighter content investment by streaming platforms as they focus on achieving profitability. At the same time, high operating costs and very intense competition are suppressing production margins. "However, we believe All3Media is well positioned as one of the world's leading independent TV and digital content producers and distributors and will continue to benefit from robust demand for its widely diversified portfolio of successful shows. We expect All3Media will deliver about 5% average revenue growth in 2024-2026 thanks to steady organic growth in production and a more rapid growth in distribution and digital content by Little Dot Studios. This is up from 2023, when revenues moderately contracted by less than 2% on the back of some long-term deals signed in 2022. "All3Media's profitability should improve. We expect All3Media's EBITDA margin will improve over the next two to three years compared with historical periods thanks to a ramp up in production and delivery of shows in the domestic and international markets, expanding share of higher-margin distribution revenue in the mix, and increased focus on operating efficiencies. Adjusted EBITDA margin already improved in 2023 to about 10% following depressed margins of 8% after the height of the pandemic when the production business was disrupted. We expect the margin will temporarily dip to about 9% in 2024, incorporating restructuring and other one-off costs related to the transaction, and recover to 10% in 2025 and onward. "Earnings growth and limited working capital outflows should support sustainably positive free cash flow. We project All3Media will generate about GBP40 million-GBP60 million of adjusted free cash flow annually in 2024-2026. This will reflect steadily increasing earnings and modest working capital outflows of about GBP10 million per year. At the same time, we do not expect FOCF to materially improve any further beyond our forecast in the next two to three years, as expanding production--especially of scripted content--will require a higher working capital investment. This is because some deals have longer payment terms where cash is received later than earnings are recognized. "We view All3Media's new owner as a financial sponsor but assume it will implement a more balanced financial policy than what we usually observe for private equity firms. In our view, RedBird IMI is a private-equity-like fund. At the same time, we expect its investment strategy and financial policy to be somewhat less aggressive in the longer-term compared with what we generally observe for private equity sponsors. RedBird is deeply involved and has expertise in the media and entertainment industry, and we believe it could grow All3Media's business inorganically by supporting acquisitions or mergers with other content-producing companies that it owns. We also believe the relatively large equity component of the transaction funding and the fact that a higher cash balance and a fully undrawn RCF will enhance All3Media's liquidity position after the transaction closes." All3Media operates in a highly competitive and fragmented content production and distribution market. The group's modest size compared with larger independent and vertically integrated peers translates into relatively low EBITDA margins of around 10% and is therefore a rating constraint. All3Media is much smaller than its rated peers, including independent studios Banijay (B+/Stable/--) and Lions Gate (B/Stable/--) and studio operations of large integrated media companies such as ITV PLC (BBB-/Stable/A-3; owner of ITV Studios) and Bertelsmann (BBB+/Stable/--, owner of Fremantle Studios). Lions Gate (for which we forecast EBITDA margins of 11%-13% for financial-year 2024) and ITV (15%-16% for financial-year 2024) benefit from the vertical integration of their in-house content production and linear broadcast and over-the-top (OTT) streaming operations. Banijay benefits from a much larger scale and scope of operations and has a more favorable revenue mix with about 80% coming from unscripted shows, which drives higher profitability. At the same time, All3Media's diversified IP library supports its credit quality. The company has 50 labels, 22 global formats and its distribution catalogue is more than 30,000 hours. The stable outlook indicates that, over the next 12 months, All3Media's revenue and EBITDA will steadily increase, leading to FOCF of GBP40 million-GBP60 million and its adjusted leverage will improve to 7.0x in 2024 and below 6.0x afterwards. The outlook also assumes the group will maintain FOCF to debt of above 5% and adjusted EBITDA-to-cash-interest-coverage ratio comfortably above 2.0x, while liquidity will remain adequate. S&P could lower the rating over the next 12 months if All3Media's FOCF to debt reduced to less than 5% and adjusted leverage remained above 6.5x. This could happen if: -- The company's revenue and EBITDA fall significantly below our base case due to weaker demand for content or the company's inability to deliver successful shows, or working capital outflows are materially higher than we currently assume; or -- The company pursues material debt-funded acquisitions or shareholder returns leading to higher leverage. In S&P's view, an upgrade is unlikely over the near term. Over the longer term, S&P could raise the rating if: -- The shareholder demonstrates a track record of a more balanced financial policy that would support the company reducing and maintaining adjusted leverage at less than 4.5x and FOCF to debt meaningfully above 10% on sustainable basis; and -- The company expands its revenue and earnings and maintains EBITDA margin above 10% on a sustainable basis. S&P said, "Governance factors are a moderately negative consideration in our credit analysis of All3Media. Our assessment of the company's financial risk profile as highly leveraged reflects corporate decision-making that prioritizes the interests of the controlling owners, which is the case for most rated entities owned by private-equity sponsors. Our assessment also reflects their generally finite holding periods and a focus on maximizing shareholder returns." JOE MEDIA: Bought Out of Administration for Second Time ------------------------------------------------------- Charlotte Tobitt at Press Gazette reports that UK digital newsbrand Joe Media has been bought out of administration for the second time in under four years. According to Press Gazette, news and lifestyle site joe.co.uk, which has social media-led model and is aimed at 18 to 35-year-olds, was rescued by Irish entrepreneur Michael O'Rourke in a pre-pack deal worth GBP3.6 million, as first reported by The Sunday Times. Administration filings reveal that Joe Media was "struggling to generate sufficient funds from its operations" to pay staff in November and there were subsequently "growing concerns about its ability" to meet the December payroll, Press Gazette discloses. KEMBLE WATER: Fitch Lowers Rating on Senior Secured Debt to 'CC' ---------------------------------------------------------------- Fitch Ratings has downgraded Kemble Water Finance Limited's (holding company of Thames Water Utilities Limited, TWUL) Long-Term Issuer Default Rating (IDR) and senior secured debt rating to 'CC' from 'CCC'. The Recovery Rating is 'RR4'. The downgrade follows Kemble's announcement on 28 March 2024 that it will not be able to fulfill its upcoming interest payments or refinance or repay the GBP190 million loan maturing on 30 April 2024, unless a maturity extension is granted by lenders. Fitch believes that some form of default is probable and even if lenders agree to amend and extend (A&E) the upcoming loan, it is highly likely that the agreement would constitute a distressed debt exchange (DDE) under its criteria, which would trigger a downgrade of Kemble to 'Restricted Default' (RD) on completion. KEY RATING DRIVERS Likely DDE Upcoming: With Kemble's shareholders not injecting the GBP500 million of equity into TWUL expected for end-March 2024, and Kemble considering it not possible currently to fulfill upcoming interest payments, Fitch believes that a downgrade to RD has become highly likely. Even assuming that lenders will agree to A&E the GBP190 million loan due on 30 April 2024, this agreement would probably constitute a DDE under its criteria. The completion of the DDE would indicate a material deviation from the original contractual terms, typically to the detriment of creditors, under financial distress conditions. The company has appointed an advisor to assist with lender and noteholder engagement. No Relief from Liquidity Line: Fitch believes Kemble can no longer draw on its GBP150 million working capital facility for debt service of secured creditors. Fitch also believes that there is a high possibility that lenders of the working capital facility may exercise their right to halt further draws following the public announcement of liquidity constraints. Limited Liquidity: TWUL's decision to distribute dividends (paid usually every six months) of GBP37.5 million in October 2023 has been subject to an information request from the UK water regulatory authority (Ofwat). To date, Ofwat has not taken action so far following its information request. Any adverse updates or negative regulatory developments could put additional strain on the already intricate A&E process at Kemble. Kemble's cash balance is estimated at about GBP20 million as of end-November 2023 while gross debt stands at GBP1.35 billion. TWUL Lock-up a Key Risk: Fitch expects increasing risk of a covenant cash-lock up at TWUL for the remainder of AMP7 (the five-year price control period ending March 2025). The risk of documentary cash lock-up is increasing, in its view, as the covenant calculation included GBP500 million and GBP250 million of additional equity receipts at TWUL in the financial year ending March 2024 (FY24), and FY25, respectively. The first tranche of GBP500 million was not received before FY24 ended following the standoff between shareholders and Ofwat. Regulatory Proposition Delays Equity Support: Ofwat's feedback to TWUL on risk-and-return for AMP8 (the five-year price control period ending March 2030) has triggered a noticeable shift in shareholder engagement. This development has had a specific impact on the timeliness of equity support assumed by management by FYE24. Both the operating company and the shareholders have expressed concerns, indicating that initial feedback (which is not a formal draft determination) on AMP8 does not represent an investible proposition, which in turn has influenced shareholders' decision to not provide timely equity support in FY24. TWUL is engaged in ongoing discussions with Ofwat and other stakeholders, intending to explore all options to secure the necessary equity investment from either new or existing shareholders Opco's Strategy for Cash Preservation: Management continues to invest in capex for FY25 but notes that mitigating actions (deferring or delaying investments) could be taken involve in order to preserve cash. Nonetheless, Fitch believes such actions, while financially prudent, could worsen TWUL's operational and environment performance. Standalone Assessment under PSL: Fitch rates Kemble on a standalone basis using the stronger subsidiary/weaker parent approach under its Parent and Subsidiary Linkage (PSL) Rating Criteria. This assessment reflects 'insulated' legal ring-fencing as underlined by a well-defined contractual framework, and tight financial controls imposed by Ofwat and designed to support TWUL's financial profile. Fitch views access and control as overall 'porous' as TWUL operates with separate cash management and a mixture of external and intercompany funding. DERIVATION SUMMARY In Fitch's view, Kemble's liquidity constraints and the high likelihood of getting to some form of Restricted Default are consistent with the 'CC' rating, which indicates that a default of some kind appears probable. KEY ASSUMPTIONS Fitch's Key Assumptions Within Its Rating Case for the Issuer: - Ofwat's final determinations financial model used as main information source - Allowed wholesale weighted average cost of capital of 1.92% (RPI-based) and 2.92% (CPIH-based) in real terms, excluding retail margins - RPI of 8% for FY24 and 3.9% for FY25 - CPIH of 6% in FY24 and 2.8% in FY25 - Net nominal cash outcome delivery incentive penalties of around GBP180 million for AMP7 - Dividend stream from TWUL not sufficient to service debt at Kemble, indicating a poor cash position and high likelihood of a DDE RECOVERY ANALYSIS Kemble's recovery analysis is based on a going-concern approach - Fitch applies a 6% discount to the reported regulatory capital value (RCV) at 30 September 2023 (GBP19.6 billion), also reflecting the large equity injections that are needed to preserve TWUL's business stability - Fitch then applies an administrative claim of 0.8% of the discounted RCV or around 10% of Kemble's outstanding debt, to reflect that the default would only occur at Kemble level (not involving TWUL) - Fitch assumes TWUL's net debt to amount to 85% of the reported RCV (correspondent to the dividend lock-up at TWUL) and Fitch adds TWUL's derivatives mark-to-market at September 2023 (GBP1.04 billion) as priority debt - For Kemble, Fitch considers the reported net debt at September 2023 (GBP1.35 billion) plus the mark-to-market of its own derivatives at the same date (around GBP160 million). Fitch does not include the draw-down of its liquidity facility, assuming this is no longer possible - Its waterfall analysis output percentage on current metrics and assumptions is 38%, corresponding to 'RR4' for senior secured debt RATING SENSITIVITIES Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Fitch does not expect to take positive rating action at least until after the IDR is downgraded to 'RD' with the DDE executed and the amended structure re-rated. Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Fitch expects to downgrade the IDR to 'C' when Kemble enters into a cure period following non-payment of a material financial obligation or when it formally announces a DDE. - The rating could be downgraded to 'RD' when the DDE is executed or to 'D' in the absence of an agreement with lenders and bondholders, leading to bankruptcy filings or other procedures LIQUIDITY AND DEBT STRUCTURE Strained Liquidity: With only GBP20 million of cash balance estimated at end-November 2023, liquidity is insufficient to cover interest payments (around GBP80 million-GBP85 million in FY24) and short-term debt maturities, which are related to a GBP190 million syndicated loan due 30 April 2024. The are no further debt maturities in FY25, and the next maturities are due in FY26 for about GBP510 million between July-December 2025. Draw stop by lenders prevent draw down on the GBP150 million working capital facility expiring November 2027, sized to cover 18 months of interest payments. Fitch does not rate TWUL, but Fitch focuses on TWUL's ability to pay dividends and support the debt servicing at Kemble. Fitch expected dividends from TWUL (if any) will be insufficient to cover Kemble's annual interest burden going forward. ISSUER PROFILE Kemble is the holding company of TWUL, the largest Ofwat-regulated, regional monopoly provider of water and wastewater services in England and Wales, based on its RCV of about GBP18.9 billion as of end-FY23. TWUL provides water and wastewater services to over 15 million customers across London and the Thames Valley. SUMMARY OF FINANCIAL ADJUSTMENTS - Statutory cash interest reconciled with investor reports - Statutory total debt reconciled with investor reports - Capex and EBITDA net of grants and contributions - Cash post maintenance interest cover ratios adjusted to include 50% of the accretion charge on index-linked swaps with five-year pay-down, and 100% of the accretion charge on indexed-linked swaps with less than five-year pay-down ESG CONSIDERATIONS Kemble has an ESG Relevance Score of '4' for customer welfare - fair messaging, privacy & data security due to large penalties expected for the customer service performance measure in AMP7. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Kemble has an ESG Relevance Score of '4' for group structure due to its debt being contractually and structurally subordinated to TWUL, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Kemble has an ESG Relevance Score of '4' for exposure to environmental impacts due to the impact severe weather events could have on its operational performance and financial profile. These include colder winters, heavy rainfalls and extreme heat during summers that cause higher leakage and mains bursts, as well as higher internal sewer flooding and pollution incidents. Although severe weather events are unpredictable in nature, they have the potential to significantly increase operating costs and lead to additional outcome delivery incentives penalties and regulatory fines from combined sewer overflows, which have a negative impact on the credit profile, and are relevant to the ratings in conjunction with other factors. Kemble has an ESG Relevance Score of '4' for water & wastewater management due to TWUL's significantly weaker-than-sector average operational performance and sizeable penalties under AMP7. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. 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 ----------- ------ -------- ----- Thames Water (Kemble) Finance Plc senior secured LT CC Downgrade RR4 CCC Kemble Water Finance Limited LT IDR CC Downgrade CCC senior secured LT CC Downgrade RR4 CCC STONEGATE: Expresses Going Concern Doubt, Races to Refinance Debts ------------------------------------------------------------------ Daniel Woolfson at The Telegraph reports that the owner of Slug & Lettuce has raised concerns over its future as it races to refinance more than GBP2 billion in debts. Stonegate, which is the UK's biggest pub operator with more than 4,000 sites across the UK, warned in newly filed accounts that there was a "material uncertainty" around its ability to continue as a going concern, the Telegraph relates. This stems from challenges in being able to refinance GBP2.2 billion of debts before 2025, the Telegraph notes. According to the Telegraph, in its latest annual report, bosses said: "While there is a plan in place for refinancing this debt, as at the date of signing the financial statements there is a risk that it exists over the completion of this exercise." If the company is unable to do this, it said it "may be unable to realise its assets and discharge its liabilities in the normal course of business". Stonegate is domiciled in the Cayman Islands and owned by the private equity firm TDR Capital, which also jointly owns Asda. As well as Slug & Lettuce, Stonegate runs the Be At One and Popworld bar chains and the Craft Union pub brand. Stonegate's total debts were north of GBP3 billion at the end of its financial year, some of which is linked to its buyout of rival pub chain Ei Group in 2019. The deal, which turned Stonegate into Britain's largest pub operator, valued Ei at £3bn, of which £1.7bn was debt. Soaring interest rates in the wake of the pandemic have heaped pressure on businesses with large amounts of borrowings as the cost of financing debts jumped, the Telegraph discloses. In January, ratings agency Fitch warned it may have to downgrade Stonegate's outlook if it cannot refinance its GBP2.2 billion debt pile, the Telegraph recounts. It emerged in February that Stonegate had drafted in advisers at Evercore and Kirkland & Ellis to help assess its options, the Telegraph relates. The warning over Stonegate's debts comes after the company signed a deal in December to refinance a portfolio of around 1,000 pubs for GBP638 million, the Telegraph notes. Gary Lindsay, managing partner at TDR Capital, told the business and trade select committee in January he was "confident" Stonegate would be able to refinance its debts, the Telegraph relays. Revenues at Stonegate rose by just over GBP100 million to GBP1.7 billion over the year to September 2023, accounts show, with the company recording a pre-tax loss of GBP257 million, the Telegraph discloses. According to the Telegraph, in its accounts, Stonegate said: "While the macroeconomic environment continues to have an impact on the group and the cost-of-living crisis has led to lower profit and operating cash flows than would otherwise have resulted had these conditions not existed, overall the group has delivered a highly respectable performance." TED BAKER: Next, Frasers Express Interest to Acquire Business ------------------------------------------------------------- Daniel Woolfson at The Telegraph reports that Next and Frasers have emerged as potential suitors for what remains of the collapsed retailer Ted Baker. Next, which is run by Tory peer Lord Wolfson; and Frasers, which is majority-owned by Sports Direct tycoon Mike Ashley, have both expressed an interest in acquiring the fashion brand, as first reported by The Times, the Telegraph relates. It comes after Ted Baker's UK parent, No Ordinary Designer Label, collapsed into administration last month, hiring advisors at restructuring company Teneo to oversee the process, the Telegraph notes. According to the Telegraph, administrators said it had built up "a significant level of arrears" and had been trading below expectations. Both Next and Frasers have built up a reputation for buying up troubled retail brands over recent years as many high street names ran into difficulties. Prior to its parent company's collapse, Ted Baker employed around 1,000 people in the UK and ran 46 stores. Administrators announced the closure of 11 loss-making stores on April 8, including sites in Leeds, Liverpool, London Bridge and Milton Keynes, as well as a further four stores whose landlords served notice, the Telegraph discloses. Around 250 jobs have been lost with the round of closures, which leaves Ted Baker's presence on the UK's high streets significantly reduced, states. Teneo, as cited by the Telegraph, said the stores "have no prospect of being returned to profitability, even with material rent reductions". "As such, their closure is believed to be a constructive and necessary step in ensuring the business can deliver a profitable trading performance in the future," it added. It is understood that, even if a suitor rescues what remains of the business, the closed stores will not be included, according to the Telegraph. THAMES WATER: Creditors Pick Advisers for Restructuring Talks ------------------------------------------------------------- Giulia Morpurgo, Laura Benitez and Lucca de Paoli at Bloomberg News report that a group of creditors of Thames Water's operating company have picked advisers for potential restructuring talks. The investors chose Jefferies Financial Group Inc. as a financial adviser and Akin Gump Strauss Hauer & Feld LLP for legal representation, said people familiar with the matter, who spoke to Bloomberg on the condition of anonymity. The creditors own private and public bonds from Thames Water Utilities Ltd., Bloomberg discloses. The moves comes as parent company Kemble Water Finance Ltd. defaulted last week on about GBP1.4 billion (US$1.8 billion) of debt after failing to make an interest payment, the latest escalation in a crisis at the UK's largest water utility, Bloomberg notes. According to Bloomberg, lenders and bondholders to the operating companies, a ring-fenced group previously seen as insulated from the parent's troubles, have begun coordinating ahead of potential debt talks with the firm. Forming groups would streamline talks and potentially give creditors more clout in dictating terms, Bloomberg says. While tight utility regulation means that Thames Water should continue to operate even though its parent company has defaulted, investors want to protect themselves in case the restructuring might spread to the rest of the group, Bloomberg states. TRINITY SQUARE 2021-1: S&P Assigns Prelim B-(sf) Rating to X Notes ------------------------------------------------------------------ S&P Global Ratings assigned its preliminary credit ratings to Trinity Square 2021-1 PLC's class A, B-Dfrd to G-Dfrd, and X-Dfrd notes. The transaction will also issue class H-Dfrd and Z notes; S1, S2, and Y certificates. Trinity Square 2021-1 is a static RMBS transaction that securitizes a portfolio of GBP666 million owner-occupied and buy-to-let (BTL) mortgage loans secured on properties in the U.K. The transaction is a refinancing of the Trinity Square 2021-1 PLC transaction, which closed in March 2021. The original Trinity Square PLC 2021-1 transaction was a refinancing of the Trinity Square 2015-1 PLC and Trinity Square 2016-1 PLC transactions, which closed in December 2015 and February 2016, respectively. At closing, there will be no sale of mortgages as this had happened during the original transaction. The issuer will issue new notes on the closing date and use the issuance proceeds to fully redeem the original notes on their optional redemption date (April 15, 2024). The portfolio will secure the new notes with the beneficial interest remaining with the issuer. S&P understands that the transaction parties will acknowledge that there are no further liabilities outstanding for the original notes after the closing date. S&P considers the collateral to be nonconforming based on the prevalence of loans to self-certified borrowers and borrowers with adverse credit history, such as prior county court judgments (CCJs), an individual voluntary arrangement, or a bankruptcy order. The pool is well-seasoned with more than 98% of loans being more than 10 years seasoned. Approximately 4.8% of the pool comprises BTL loans, and the remaining 95.2% are owner-occupier loans. There is high exposure to interest-only loans in the pool at 74.5%, and 13.1% of the mortgage loans are currently in arrears greater than (or equal to) one month. A general reserve fund will provide credit enhancement for the class A to G-Dfrd notes, a liquidity reserve fund will provide liquidity support for the class A and B-Dfrd notes, and principal can be used to pay senior fees and interest on the notes subject to various conditions. Kensington Mortgage Company Ltd. is the mortgage administrator in this transaction. S&P said, "There are no rating constraints in the transaction under our counterparty, operational risk, or structured finance sovereign risk criteria. We consider the issuer to be bankruptcy remote. "Our credit and cash flow analysis and related assumptions consider the transaction's ability to withstand the potential repercussions of the cost of living crisis, namely higher defaults and longer recovery timing. As the situation evolves, we will update our assumptions and estimates accordingly." Preliminary ratings CLASS PRELIM. RATING* CLASS SIZE (%) A AAA (sf) 89.00 B-Dfrd AA- (sf) 5.00 C-Dfrd A- (sf) 1.75 D-Dfrd BBB (sf) 0.75 E-Dfrd BB- (sf) 0.75 F-Dfrd B- (sf) 0.75 G-Dfrd CCC (sf) 0.75 H-Dfrd NR 1.25 X-Dfrd B- (sf) 1.50 Z NR 1.00 S1 cert§ NR N/A S2 cert§ NR N/A Y cert NR N/A VRR loan NR 5.00 *S&P's preliminary 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. §The S1 and S2 certificates pay a fixed rate on the loans' outstanding balance. N/A--Not applicable. NR--Not rated. VRR--Vertical risk retention. ********* S U B S C R I P T I O N I N F O R M A T I O N Troubled Company Reporter-Europe is a daily newsletter co- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman, Editors. Copyright 2024. All rights reserved. ISSN 1529-2754. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The TCR Europe subscription rate is US$775 per half-year, delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are US$25 each. For subscription information, contact Peter Chapman at 215-945-7000. * * * End of Transmission * * *