/raid1/www/Hosts/bankrupt/TCREUR_Public/240604.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
Tuesday, June 4, 2024, Vol. 25, No. 112
Headlines
F R A N C E
INOVIE GROUP: Fitch Affirms 'B' LongTerm IDR, Outlook Negative
I R E L A N D
AQUEDUCT EUROPEAN 8: Fitch Assigns B-(EXP) Rating on Cl. F Notes
ARES EUROPEAN XVI: S&P Assigns B-(sf) Rating on Class F-R Notes
HENLEY CLO X: Fitch Assigns 'B-sf' Final Rating on Class F Notes
HENLEY CLO X: S&P Assigns B-(sf) Rating on Class F Notes
INVESCO EURO III: Fitch Affirms 'B-sf' Rating on Class F Notes
PEARL MORTGAGE 1: Fitch Affirms 'B-sf' Rating on Class B Notes
I T A L Y
QUARZO SRL 2024: Moody's Assigns (P)Ba1 Rating to Series D Notes
L U X E M B O U R G
INCEPTION HOLDCO: Fitch Assigns 'B+' Rating on New Term Loan B
TSM II LUXCO: Moody's Assigns First Time 'B2' Corp. Family Rating
N E T H E R L A N D S
KONINKLIJKE KPN: Moody's Affirms 'Ba2' Junior Subordinate Rating
TSM II LUXCO: S&P Assigns Preliminary 'B+' LT ICR, Outlook Stable
R O M A N I A
MAS PLC: Moody's Affirms 'Ba2' CFR & Alters Outlook to Negative
R U S S I A
UZBEKISTAN: S&P Affirms 'BB-/B' Sovereign Credit Ratings
S P A I N
UVESCO FOOD: Moody's Affirms 'B2' CFR, Outlook Remains Stable
U N I T E D K I N G D O M
DAMEN SHIPYARDS: Damen Files Bankruptcy Request
INVERNESS CALEDONIAN: Chairman Steps Down Amid Club Challenges
MERLIN REPAIR: Goes Into Administration, 100 Workers Affected
OBAN PHOENIX: Put Into Provisional Liquidation
RINGSFIELD HALL: Liquidators Reject Kinda's Bid for Eco-Centre
SMIFFYS: Set to Go Into Administration
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F R A N C E
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INOVIE GROUP: Fitch Affirms 'B' LongTerm IDR, Outlook Negative
--------------------------------------------------------------
Fitch Ratings has affirmed Inovie Group's Long-Term Issuer Default
Rating (IDR) at 'B' with Negative Outlook. Fitch also affirmed
Inovie's senior secured rating at 'B+' with a Recovery Rating of
'RR3'.
The 'B' IDR reflects the modest scale of Inovie relative to peers',
its high financial leverage and its reliance on a single
reimbursement system, which is compensated by its strong position
in the highly regulated and non-cyclical French lab-testing market,
strong profitability and positive free cash flow (FCF) generation.
The Negative Outlook reflects Inovie's excessive leverage and
uncertainty over the pace of expected EBITDA growth on which
deleveraging depends. Inovie's margin declined significantly in
2022 and 2023, caused by a sharp contraction in Covid-19 revenue.
KEY RATING DRIVERS
Negative Sensitivities Breached: EBITDAR gross leverage rose to
8.8x in 2023 from 6.3x in 2022 and Fitch expects it to remain
materially above its 6.8x negative sensitivity in 2024. FCF margins
also breached its negative sensitivity, as they declined to
low-single digits on lower EBITDA margins and higher interest
costs.
Temporary Pressure on Margins: The sharp reduction in Covid-19
sales in 2023 caused Inovie's sales and its EBITDA margin to fall
by 22% and to 25.6%, respectively, (the latter from 29.2% in 2022
and 38.4% in 2021). The weaker margin was driven by negative
operating leverage but also by delays in adjusting the personnel
cost base, cost inflation and challenges with the integration of
its large 2022 acquisitions of Biofutur and Bioclinic in the Paris
region. Fitch views this margin reduction as temporary.
New Triennial Act Improves Visibility: In July 2023 the French
authorities agreed on a new triennial act covering 2024-2026 that
will increase the regulated envelope (aka budget) for routine tests
by 0.4% annually, with volume growth being offset by reimbursement
decreases. Fitch sees the new act providing enough visibility for
Inovie to adjust its cost base to gradually improve its margins.
Gradual Margin Recovery Expected: Fitch believes Inovie's
profitability will gradually improve over 2024-2026 as it adapts
its personnel structure to post-Covid activity, cost inflation
stabilises and margins improve in the Paris region. Fitch projects
a gradual recovery in EBITDA margins towards 32% by 2026. However,
Fitch sees uncertainty over the pace of EBITDA growth due to modest
organic revenue growth prospects in a tightly regulated industry.
Execution risks are captured in the Negative Outlook.
Deleveraging Contingent on Financial Policy: The pace of
deleveraging is contingent on the magnitude of EBITDA growth and on
the group's financial policy. Fitch expects Inovie's buy-and-build
M&A strategy to remain on hold in 2024 and 2025, with only minor
acquisitions of small labs, as the group focuses on cost
optimisation and organic deleveraging.
Sustainable Business Model: Inovie has a sustainable business model
in a defensive sector. It is the third largest network of private
medical-testing laboratories in France, with a focus on south and
central regions. Its 2022 acquisitions of Biofutur and Bioclinic
have allowed it to become the third-largest operator in the Paris
(Ile-de-France) region, diversifying its geographic presence and
giving exposure to a region with above national-average growth.
Fitch expects Inovie to benefit from stable revenue, high and
resilient margins and sustained positive FCF, supported by a
favourable regulation and reimbursement regime, combined with
strong barriers to entry.
DERIVATION SUMMARY
Inovie's 'B' rating is in line with that of Laboratoire Eimer Selas
(Biogroup; B/Negative) and Ephios Subco 3 S.a.r.l (Synlab;
B/Positive), both of whom are direct routine medical lab-testing
peers. The profitability, cash generation and leverage of Inovie
and its direct peers benefited from Covid-19 related activity from
2020 to 2022, before they normalised at much lower levels in 2023.
Inovie is smaller and less diversified geographically than its
rated peers, making it highly exposed to the French market and to
potential reimbursement changes in the medium term. Synlab is
well-diversified across Europe, while Biogroup has a strong
presence in France and Belgium. Inovie's lack of geographical
diversification is partly compensated by a more diversified product
offering, with around 15% of its revenue derived from specialty
testing.
Inovie's EBITDAR leverage rose materially in 2023 to 8.8x but is
expected to gradually improve towards 6.5x in 2026, similar to its
projection for Synlab following its post-takeover re-leveraging in
2024. Inovie's leverage is slightly higher than that of Biogroup,
but Fitch expects leverage for both companies to fluctuate within
6.0x-7.0x in the medium term.
In addition, Inovie is characterised by its ownership structure,
with biologists owning a large stake at holding company level
rather than minority stakes at operating companies. This group
structure prevents value leakage to minorities and enables Inovie
to integrate small labs by offering a mix of cash and equity
partnerships, which requires less debt.
Compared with investment-grade global medical diagnostic peers such
as Eurofins Scientific S.E. (BBB-/Stable) and Quest Diagnostics
Inc. (BBB/Positive), Inovie is considerably smaller and
geographically concentrated, more exposed to the routine
lab-testing market and has much higher leverage. Inovie's rating is
supported by its expectation of strong profitability and cash flow
generation. Inovie's expected profitability is higher than Synlab's
and similar to that of French peers.
KEY ASSUMPTIONS
Fitch's Key Assumptions within its Rating Case for the Issuer:
- Organic sales growth of routine-testing revenue at 2% in
2024-2026, as volume growth and product mix offset price decreases
- Covid-19 testing revenue to decrease a further 90% in 2024,
followed by stabilisation in 2025-2027
- EBITDA margin improving towards 32% by 2026, from 28% in 2024, as
further synergies from Parisian laboratories are achieved
- Cash acquisitions of around EUR60 million in 2024, and around
EUR30 million per year in 2025-2027
- No dividend pay-outs
- Capex on average at 2.5% of revenue in 2024-2027
RECOVERY ANALYSIS
Recovery Assumptions:
In Fitch's recovery analysis, Fitch follows a going concern (GC)
approach as this leads to higher recoveries than a liquidation in a
bankruptcy.
Fitch estimates GC EBITDA at EUR250 million, slightly above 2023's,
which Fitch views as a distressed level as Inovie coped with the
abrupt contraction of Covid-19 test demand, which forced it to
readjust its personnel structure; high reimbursement pressure; and
high cost inflation.
A distressed enterprise value (EV)/EBITDA multiple of 5.5x implies
a discount of 0.5x to the multiples of more geographically
diversified and larger direct competitors Biogroup and Synlab.
Inovie's committed revolving credit facility (RCF) of EUR175
million is assumed fully drawn prior to distress, in line with
Fitch's Recovery Ratings Criteria.
Structurally higher-ranking senior debt at subsidiary level of
EUR113 million ranks ahead of Inovie's RCF and term loan B (TLB).
After deducting 10% for administrative claims from the estimated
post-distress EV, its waterfall analysis generates a ranked
recovery for the senior secured debt (including RCF and TLB) in the
'RR3' band, indicating a 'B+' instrument rating. The waterfall
analysis output percentage on current metrics and assumptions is
53%.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Upgrade:
- Improvement in business profile including an increase in scale
and increased product/geographical diversification
- EBITDAR gross leverage below 4.8x on a sustained basis (pro-forma
for acquisitions)
-EBITDAR fixed-charge coverage above 2.0x on a sustained basis
(pro-forma for acquisitions)
Factors That Could, Individually or Collectively, Lead to the
Outlook Being Revised to Stable:
- Visibility on EBITDAR gross leverage decreasing towards 6.8x in
the next 12-24 months
- EBITDAR fixed-charge coverage above 1.5x
- Stable operating performance leading to FCF margin at least in
mid-single digits
Factors That Could, Individually or Collectively, Lead to
Downgrade:
- Adverse regulatory changes and/or loss of discipline in M&A
target selection leading to weak operating performance and eroding
profitability
- Lack of visibility on EBITDAR gross leverage decreasing towards
6.8x by 2026 (pro- forma for acquisitions)
- EBITDAR fixed-charge coverage below 1.5x on a sustained basis
(pro-forma for acquisitions)
- FCF margin in low single digits on a sustained basis
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: At end-2023, Inovie had EUR68 million
(excluding Fitch-restricted cash of EUR20 million) cash on its
balance sheet. This, together with the remaining undrawn RCF of
EUR77 million, is sufficient to cover potential short-term
disruptions.
Inovie benefits from long-dated debt maturities, with its RCF
maturing in September 2027 and its TLB in March 2028.
ISSUER PROFILE
Inovie is one of France's largest providers of routine diagnostic
tests in the private lab-testing market.
ESG CONSIDERATIONS
Inovie has an ESG Relevance Score of '4' for social impacts due to
its exposure to the French regulated medical lab-testing market,
which is subject to pricing and reimbursement pressures as the
government seeks to control national healthcare spending. This has
a negative impact on Inovie's credit profile and is relevant to
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
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Inovie Group LT IDR B Affirmed B
senior secured LT B+ Affirmed RR3 B+
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I R E L A N D
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AQUEDUCT EUROPEAN 8: Fitch Assigns B-(EXP) Rating on Cl. F Notes
----------------------------------------------------------------
Fitch Ratings has assigned Aqueduct European CLO 8 DAC's expected
ratings.
The assignment of final ratings is contingent on the receipt of
final documents conforming to information already reviewed.
Entity/Debt Rating
----------- ------
Aqueduct European
CLO 8 DAC
Class A Loan LT AAA(EXP)sf Expected Rating
Class A Notes LT AAA(EXP)sf Expected Rating
Class B Notes LT AA(EXP)sf Expected Rating
Class C Notes LT A(EXP)sf Expected Rating
Class D Notes LT BBB-(EXP)sf Expected Rating
Class E Notes LT BB-(EXP)sf Expected Rating
Class F Notes LT B-(EXP)sf Expected Rating
M-1 Subordinated Notes LT NR(EXP)sf Expected Rating
M-2 Subordinated Notes LT NR(EXP)sf Expected Rating
M-3 Subordinated Notes LT NR(EXP)sf Expected Rating
TRANSACTION SUMMARY
Aqueduct European CLO 8 DAC is a securitisation of mainly senior
secured obligations (at least 90%) with a component of corporate
rescue loans, senior unsecured, mezzanine, second-lien loans and
high-yield bonds. Net proceeds from the notes will be used to
purchase a portfolio with a target par of EUR400 million.
The portfolio will be actively managed by HPS Investment Partners
CLO (UK) LLP. The collateralised loan obligations (CLO) will have a
4.5-year reinvestment period and an 8.5-year weighted average life
(WAL) test.
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors at 'B'/ 'B-'. The Fitch-weighted
average rating factor (WARF) of the identified portfolio is 24.8.
High Recovery Expectations (Positive): At least 90% of the
portfolio comprises senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch-weighted
average recovery rate of the identified portfolio is 65%.
Diversified Asset Portfolio (Positive): The transaction will
include various concentration limits in the portfolio, including a
maximum fixed-rate obligation limit at 12.5%, a top 10 obligor
concentration limit at 20% and maximum exposure to the
three-largest Fitch-defined industries at 40%. These covenants
ensure the asset portfolio will not be exposed to excessive
concentration.
Portfolio Management (Neutral): The transaction will also have a
4.5-year reinvestment period and include reinvestment criteria
similar to those of other European transactions. Fitch's analysis
is based on a stressed-case portfolio with the aim of testing the
robustness of the transaction structure against its covenants and
portfolio guidelines.
Cash-flow Modelling (Positive): The WAL Fitch modelled is 12 months
less than the WAL covenant. This is to account for the strict
reinvestment conditions envisaged after the reinvestment period.
These include, among others, passing both the coverage tests and
the Fitch 'CCC' limit post reinvestment as well as a WAL covenant
that progressively steps down over time, both before and after the
end of the reinvestment period. Fitch believes these conditions
would reduce the effective risk horizon of the portfolio during the
stress period.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
Based on the identified portfolio, downgrades may occur if the loss
expectation is larger than initially assumed, due to unexpectedly
high levels of defaults and portfolio deterioration. Due to the
better metrics and shorter life of the identified portfolio than
the Fitch-stressed portfolio, the class B and D notes display a
rating cushion of two notches, and the class C, E and F notes a
cushion of three notches.
Should the cushion between the identified portfolio and the
Fitch-stressed portfolio be eroded either due to manager trading or
negative portfolio credit migration, a 25% increase of the mean
default rate (RDR) across all ratings and a 25% decrease of the
recovery rate (RRR) across all ratings of the Fitch-stressed
portfolio would lead to downgrades of up to four notches for the
rated notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings of the Fitch-stressed
portfolio would lead to an upgrade of up to four notches for the
rated notes, except for the 'AAAsf' rated notes.
During the reinvestment period, based on the Fitch-stressed
portfolio, upgrades may occur on better-than-expected portfolio
credit quality and a shorter remaining WAL test, allowing the notes
to withstand larger-than-expected losses for the remaining life of
the transaction. After the end of the reinvestment period, upgrades
may result from stable portfolio credit quality and deleveraging,
leading to higher credit enhancement and excess spread available to
cover losses in the remaining portfolio.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
Fitch does not provide ESG relevance scores for Aqueduct European
CLO 8 DAC. In cases where Fitch does not provide ESG relevance
scores in connection with the credit rating of a transaction,
programme, instrument or issuer, Fitch will disclose in the key
rating drivers any ESG factor which has a significant impact on the
rating on an individual basis.
ARES EUROPEAN XVI: S&P Assigns B-(sf) Rating on Class F-R Notes
---------------------------------------------------------------
S&P Global Ratings assigned its credit ratings to Ares European CLO
XVI DAC's class A-R Loan and class A-R, B-1-R, B-2-R, C-R, D-R,
E-R, and F-R notes. At closing, the issuer also issued subordinated
notes.
This transaction is a reset of the existing transaction that closed
in November 2022. The issuance proceeds of the refinancing notes
and loan were used to redeem the refinanced notes and loan (the
original transaction's class A-Loan and class A, B, C, D, E, and F
notes, for which S&P withdrew its ratings at the same time), and
pay fees and expenses incurred in connection with the reset.
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 and loan 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 3,053.52
Default rate dispersion 547.47
Weighted-average life (years) 4.12
Obligor diversity measure 139.00
Industry diversity measure 24.03
Regional diversity measure 1.20
Weighted-average life including reinvestment (years) 4.625
Transaction key metrics
CURRENT
Portfolio weighted-average rating
derived from S&P's CDO evaluator B
'CCC' category rated assets (%) 4.67
Actual 'AAA' weighted-average recovery (%) 36.95
Actual weighted-average spread (%) 3.92
Actual weighted-average coupon (%) 4.50
Under the transaction documents, the rated notes and loan will pay
quarterly interest unless a frequency switch event occurs.
Following this, the notes and loan will switch to semiannual
payments. The portfolio's reinvestment period will end
approximately 4.63 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 its 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 (3.92%), covenanted weighted-average coupon (4.50%), and
actual 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 Jan. 15, 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.
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 Loan and
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, D-R, E-R, and
F-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 these notes.
"In addition to our standard analysis, we have also included the
sensitivity of the ratings on the class A-R to E-R notes and based
on four hypothetical scenarios.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F-R notes."
The transaction securitizes a portfolio of primarily senior secured
leveraged loans and bonds, and is managed by Ares Management Ltd.
Environmental, social, and governance
S&P said, "We regard the exposure to environmental, social, and
governance (ESG) credit factors in the transaction as being broadly
in line with our benchmark for the sector. Primarily due to the
diversity of the assets within CLOs, the exposure to environmental
credit factors is viewed as below average, social credit factors
are below average, and governance credit factors are average. For
this transaction, the documents prohibit assets from being related
to certain activities, including, but not limited to the following:
controversial weapons, pornography or prostitution, and tobacco or
tobacco products. Accordingly, since the exclusion of assets from
these industries does not result in material differences between
the transaction and our ESG benchmark for the sector, we have not
made any specific adjustments in our rating analysis to account for
any ESG-related risks or opportunities."
Ratings list
AMOUNT CREDIT
CLASS RATING* (MIL. EUR) INTEREST RATE§ ENHANCEMENT
(%)
A-R AAA (sf) 160.20 3mE + 1.46% 38.95
A-R Loan AAA (sf) 84.00 3mE + 1.46% 38.95
B-1-R AA (sf) 24.40 3mE + 2.15% 29.10
B-2-R AA (sf) 15.00 5.65% 29.10
C-R A (sf) 25.20 3mE + 2.70% 22.80
D-R BBB- (sf) 27.40 3mE + 3.90% 15.95
E-R BB- (sf) 19.80 3mE + 7.24% 11.00
F-R B- (sf) 12.00 3mE + 8.28% 8.00
Sub notes NR 51.10 N/A N/A
*The ratings assigned to the class A-R Loan and class A-R, B-1-R,
and B-2-R notes address timely interest and ultimate principal
payments. The ratings assigned to the class C-R, D-R, E-R, and F-R
notes address ultimate interest and principal payments.
§The payment frequency switches to semiannual and the index
switches to 6mE when a frequency switch event occurs. NR--Not
rated.
N/A--Not applicable.
3mE--Three-month Euro Interbank Offered Rate.
HENLEY CLO X: Fitch Assigns 'B-sf' Final Rating on Class F Notes
----------------------------------------------------------------
Fitch Ratings has assigned Henley CLO X DAC final ratings.
Entity/Debt Rating Prior
----------- ------ -----
Henley CLO X DAC
Class A XS2804515331 LT AAAsf New Rating AAA(EXP)sf
Class B XS2804515505 LT AAsf New Rating AA(EXP)sf
Class C XS2804516065 LT Asf New Rating A(EXP)sf
Class D XS2804516149 LT BBB-sf New Rating BBB-(EXP)sf
Class E XS280451649 LT BB-sf New Rating BB-(EXP)sf
Class F XS2804516651 LT B-sf New Rating B-(EXP)sf
Subordinated Notes
XS2804516818 LT NRsf New Rating NR(EXP)sf
TRANSACTION SUMMARY
Henley CLO X DAC is a securitisation of mainly senior secured
obligations (at least 90%) with a component of senior unsecured,
mezzanine, second-lien loans, first-lien, last-out loans and
high-yield bonds. Net proceeds from the notes issuance have been
used to fund a portfolio with a target par of EUR450 million. The
portfolio is actively managed by Napier Park Global Capital Ltd
(NPGC). The transaction has a 5.1-year reinvestment period and a
7.5-year weighted average life (WAL) test.
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch assesses the
average credit quality of obligors at 'B'/'B-'. The Fitch-weighted
average rating factor (WARF) of the identified portfolio is 25.9.
High Recovery Expectations (Positive): At least 90% of the
portfolio will comprise senior secured obligations. Fitch views the
recovery prospects for these assets as more favourable than for
second-lien, unsecured and mezzanine assets. The Fitch-weighted
average recovery rate (WARR) of the identified portfolio is 62.1%.
Diversified Portfolio (Positive): The transaction has two matrices
that are effective at closing. These correspond to a top-10 obligor
concentration limit at 20%, two fixed-rate asset limits of 5% and
15%, and a 7.5-year WAL. It has another two matrices, corresponding
to the same limits but a seven-year WAL, which can be selected by
the manager any time from 18 months after closing if WAL step-up
does not happen or from 24 months after closing if WAL step-up
occurs, provided that the aggregate collateral balance (including
defaulted obligations at Fitch collateral value) is above the
reinvestment target par.
The transaction also has various concentration limits of the
portfolio, including a maximum exposure to the three largest
Fitch-defined industries at 40%. These covenants ensure the asset
portfolio will not be exposed to excessive concentration.
WAL Step-Up Feature (Neutral): The transaction can extend the WAL
by one year and a half, to 7.5 years, on the step-up determination
date, which is one year and a half after closing. The WAL extension
is subject to conditions including satisfying the
collateral-quality test, portfolio-profile test, coverage test and
the aggregate collateral balance (including defaulted obligations
at Fitch collateral value) being at least equal to the reinvestment
target par balance.
Portfolio Management (Neutral): The transaction has a 5.1-year
reinvestment period, which is governed by reinvestment criteria
that are similar to those of other European transactions. Fitch's
analysis is based on a stressed-case portfolio with the aim of
testing the robustness of the transaction structure against its
covenants and portfolio guidelines.
Cash Flow Modelling (Positive): The WAL used for the transaction's
Fitch-stressed portfolio and matrices analysis is 12 months less
than the WAL covenant. This is to account for the strict
reinvestment conditions envisaged by the transaction after its
reinvestment period. These include passing both the coverage tests
and the Fitch 'CCC' maximum limit, as well as a WAL covenant that
progressively steps down over time, both before and after the end
of the reinvestment period. Fitch believes these conditions would
reduce the effective risk horizon of the portfolio during the
stress period.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
A 25% increase of the mean default rate (RDR) across all ratings
and a 25% decrease of the recovery rate (RRR) across all ratings of
the identified portfolio would lead to a downgrade of no more than
one notch for the class D notes and to below 'B-sf' for the class F
notes and no impact on the rest.
Downgrades, which are based on the identified portfolio, may occur
if the loss expectation is larger than initially assumed, due to
unexpectedly high levels of default and portfolio deterioration.
Due to the better metrics and shorter life of the identified
portfolio than the Fitch-stressed portfolio, the class B, D and E
notes display a rating cushion of two notches while the class C and
F notes have three notches. The class A notes are at the highest
achievable rating and therefore have no rating cushion.
Should the cushion between the identified portfolio and the
Fitch-stressed portfolio be eroded either due to manager trading or
negative portfolio credit migration, a 25% increase of the mean RDR
across all ratings and a 25% decrease of the RRR across all ratings
of the Fitch-stressed portfolio would lead to a downgrade of up to
four notches for the class A, B and C notes, three notches for the
class D notes and to below 'B-sf' for the class E and F notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction of the mean RDR across all ratings and a 25%
increase in the RRR across all ratings of the Fitch-stressed
portfolio would result in an upgrade of no more than two notches
across the structure, apart from the 'AAAsf' notes.
During the reinvestment period, upgrades, which are based on the
Fitch-stressed portfolio, may occur on better-than-expected
portfolio credit quality and a shorter remaining WAL test, allowing
the notes to withstand larger-than-expected losses for the
remaining life of the transaction. After the end of the
reinvestment period, upgrades may result from a stable portfolio
credit quality and deleveraging, leading to higher credit
enhancement and excess spread available to cover losses in the
remaining portfolio.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
Fitch does not provide ESG relevance scores for Henley CLO X DAC.
In cases where Fitch does not provide ESG relevance scores in
connection with the credit rating of a transaction, programme,
instrument or issuer, Fitch will disclose in the key rating drivers
any ESG factor which has a significant impact on the rating on an
individual basis.
HENLEY CLO X: S&P Assigns B-(sf) Rating on Class F Notes
--------------------------------------------------------
S&P Global Ratings assigned credit ratings to Henley CLO X DAC's
class A to F European cash flow CLO notes. The issuer also issued
unrated subordinated notes.
Under the transaction documents, the rated notes pay quarterly
interest unless a frequency switch event occurs. Following this,
the notes will permanently switch to semiannual payments.
The portfolio's reinvestment period will end approximately five
years after closing, while the non-call period will end
approximately two years after closing.
The ratings reflect S&P's assessment of:
-- The diversified collateral pool, which primarily comprises
broadly syndicated speculative-grade senior secured term loans 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 is in line with
S&P's counterparty rating framework.
Portfolio benchmarks
CURRENT
S&P Global Ratings' weighted-average rating factor 3,018.33
Default rate dispersion 407.97
Weighted-average life (years) 4.70
Weighted-average life (years) extended to
cover the length of the reinvestment period 5.14
Obligor diversity measure 138.52
Industry diversity measure 20.15
Regional diversity measure 1.31
Transaction key metrics
CURRENT
Portfolio weighted-average rating
derived from S&P's CDO evaluator B
'CCC' category rated assets (%) 0.44
Actual 'AAA' weighted-average recovery (%) 36.18
Actual weighted-average spread (net of floors; %) 4.30
S&P said, "Our ratings reflect our assessment of the collateral
portfolio's credit quality, which has a weighted-average rating of
'B'. We understand that the portfolio is well-diversified,
primarily comprising broadly syndicated speculative-grade senior
secured term loans and senior secured bonds. Therefore, we have
conducted our credit and cash flow analysis by applying our
criteria for corporate cash flow CDOs.
"In our cash flow analysis, we used the EUR450 million target par
amount, the covenanted weighted-average spread (4.10%), the
covenanted weighted-average coupon (4.75%), and the actual
portfolio weighted-average recovery (WAR) rates for all rated
notes, except the class A notes, where we used covenanted WAR rate
of 35.75% provided by the 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.
"Until the end of the reinvestment period on July 20, 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 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, if the initial ratings are maintained.
"Under our structured finance sovereign risk criteria, 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. The issuer is a special-purpose entity that meets our
criteria for bankruptcy remoteness.
"Our credit and cash flow analysis show that the class B, C, D, and
E notes benefit from break-even default rate (BDR) and scenario
default rate cushions that we would typically consider to be in
line with higher ratings than those assigned. However, as the CLO
is still in its reinvestment phase, during which the transaction's
credit risk profile could deteriorate, we have capped our ratings
on the notes. The class A notes can withstand stresses commensurate
with the assigned rating.
"For the class F notes, our credit and cash flow analysis indicate
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 notes reflects several key
factors, including:
-- The class F notes' available credit enhancement, which is in
the same range as that of other CLOs S&P has rated and that has
recently been issued in Europe.
-- The portfolio's average credit quality, which is similar to
other recent CLOs.
-- S&P's model generated BDR at the 'B-' rating level of 28.23%
(for a portfolio with a weighted-average life of 5.14 years),
versus if we were to consider a long-term sustainable default rate
of 3.1% for 5.14 years, which would result in a target default rate
of 15.93%.
-- S&P does not believe that there is a one-in-two chance of this
tranche 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 notes is commensurate with the
assigned 'B- (sf)' rating.
-- Following S&P's analysis of the credit, cash flow,
counterparty, operational, and legal risks, it believes its ratings
are commensurate with the available credit enhancement for the
class A to F notes.
S&P said, "In addition to our standard analysis, to indicate how
rising pressures among speculative-grade corporates could affect
our ratings on European CLO transactions, we have also included the
sensitivity of the ratings on the class A to E notes based on four
hypothetical scenarios.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category--and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met--we have not included the above scenario analysis results
for the class F notes."
Environmental, social, and governance
S&P said, "We regard the exposure to environmental, social, and
governance (ESG) credit factors in the transaction as being broadly
in line with our benchmark for the sector. Primarily due to the
diversity of the assets within CLOs, the exposure to environmental
credit factors is viewed as below average, social credit factors
are below average, and governance credit factors are average."
Ratings
AMOUNT CREDIT
CLASS RATING* (MIL. EUR) ENHANCEMENT (%) INTEREST RATE§
A AAA (sf) 275.60 38.76 Three/six-month EURIBOR
plus 1.48%
B AA (sf) 46.10 28.51 Three/six-month EURIBOR
plus 2.10%
C A (sf) 27.00 22.51 Three/six-month EURIBOR
plus 2.65%
D BBB- (sf) 34.90 14.76 Three/six-month EURIBOR
plus 3.75%
E BB- (sf) 20.90 10.11 Three/six-month EURIBOR
plus 6.65%
F B- (sf) 16.20 6.51 Three/six-month EURIBOR
plus 8.26%
Sub. Notes NR 36.20 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, 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.
INVESCO EURO III: Fitch Affirms 'B-sf' Rating on Class F Notes
--------------------------------------------------------------
Fitch Ratings has upgraded Invesco Euro CLO III DAC's class D
notes, and affirmed the other notes.
Entity/Debt Rating Prior
----------- ------ -----
Invesco Euro
CLO III DAC
A XS2072089902 LT AAAsf Affirmed AAAsf
B-1 XS2072090587 LT AAsf Affirmed AAsf
B-2 XS2072091478 LT AAsf Affirmed AAsf
C XS2072092013 LT Asf Affirmed Asf
D XS2072092799 LT BBBsf Upgrade BBB-sf
E XS2072093334 LT BB-sf Affirmed BB-sf
F XS2072093508 LT B-sf Affirmed B-sf
TRANSACTION SUMMARY
Invesco Euro CLO III DAC is a cash flow CLO comprising mostly
senior secured obligations. The transaction is actively managed by
Invesco European RR L.P. and will exit its reinvestment period in
July 2024.
KEY RATING DRIVERS
Performance Better Than Expected Case: Since Fitch's last rating
action in July 2023, the portfolio's performance has been stable.
As per the last trustee report dated 3 April 2024, the transaction
was passing all of its collateral quality and portfolio profile
tests apart from its weighted average life (WAL) test. The
transaction is currently 0.5% below par.
Exposure to assets with a Fitch-derived rating of 'CCC+' and below
is 6.6%, according to the trustee report, versus a limit of 7.5%.
The transaction has approximately EUR5.5 million of defaulted
assets in the portfolio, but total par loss is well below its
rating case assumptions.
Manageable Refinancing Risk: The transaction has manageable
exposure to near- and medium-term refinancing risk, with 3.5% of
the assets in the portfolio maturing in 2024 and 8.3% in 2025, as
calculated by Fitch, in view of the large default-rate cushions for
each class of notes. The transaction's stable performance has
resulted in larger break-even default-rate cushions since the last
review. This has led to today's rating actions.
High Recovery Expectations: Senior secured obligations comprise
99.9% of the portfolio. Fitch views the recovery prospects for
these assets as more favourable than for second-lien, unsecured and
mezzanine assets. The Fitch-calculated weighted average recovery
rate (WARR) of the current portfolio was 63.4%.
Diversified Portfolio: The portfolio is well-diversified across
obligors, countries and industries. The top 10 obligor
concentration, as calculated by Fitch, is 21.5%, and no obligor
represents more than 2.7% of the portfolio balance. Exposure to the
three-largest Fitch-defined industries is 36.1% as calculated by
the trustee. Fixed-rate assets reported by the trustee are 3.3% of
the portfolio balance, which compares favourably to a limit of 5%.
Cash Flow Analysis: Fitch used a customised proprietary cash flow
model to replicate the principal and interest waterfalls and the
various structural features of the transaction, and to assess their
effectiveness, including the structural protection provided by
excess spread diverted through the par-value and interest-coverage
tests.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
Based on the current portfolio, downgrades may occur if the loss
expectation is larger than initially assumed, due to unexpectedly
high levels of default and portfolio deterioration.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Upgrades may result from stable portfolio credit quality and
deleveraging, leading to higher credit enhancement and excess
spread available to cover losses in the remaining portfolio.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
The majority of the underlying assets or risk-presenting entities
have ratings or credit opinions from Fitch and/or other nationally
recognised statistical rating organisations and/or European
securities and markets authority-registered rating agencies. Fitch
has relied on the practices of the relevant groups within Fitch
and/or other rating agencies to assess the asset portfolio
information or information on the risk-presenting entities.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
Fitch does not provide ESG relevance scores for Invesco Euro CLO
III DAC. In cases where Fitch does not provide ESG relevance scores
in connection with the credit rating of a transaction, programme,
instrument or issuer, Fitch will disclose in the key rating drivers
any ESG factor which has a significant impact on the rating on an
individual basis.
PEARL MORTGAGE 1: Fitch Affirms 'B-sf' Rating on Class B Notes
--------------------------------------------------------------
Fitch Ratings has affirmed PEARL Mortgage Backed Securities 1
B.V.'s (PEARL 1) notes.
Entity/Debt Rating Prior
----------- ------ -----
PEARL Mortgage Backed
Securities 1 B.V.
Class A XS0265250638 LT AAAsf Affirmed AAAsf
Class B XS0265252253 LT B-sf Affirmed B-sf
Class S XS0715998331 LT AA+sf Affirmed AA+sf
TRANSACTION SUMMARY
PEARL 1 is backed by a portfolio of prime Dutch residential
mortgage loans, made up of 100% NHG-guaranteed mortgage loans and
originated by de Volksbank N.V.
KEY RATING DRIVERS
Increasing CE: Credit enhancement (CE) available to the notes is
provided by subordination. CE has been increasing for the class A
and S notes as the transaction amortises sequentially. Since the
last review, CE has increased to 26% from 23.5% for the class A
notes, and to 4.6% from 4.1% for the class S notes. The class B
notes do not benefit from CE, and protection from defaults stems
solely from excess spread.
Good Asset Performance: The underlying portfolio continues to
perform well, with loans in arrears for more than 90 days remaining
low, representing 0.37% of the current outstanding balance. In
addition, there have been no foreclosures or realised losses
reported since closing.
Elevated ESG Score: Pearl 1 currently has the highest ESG Relevance
Score for Human Rights, Community Relations, Access & Affordability
due to the securitised assets benefiting from NHG guarantees, which
has a positive impact on the credit profile, and on an individual
basis, has a significant impact on the rating.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- Unanticipated increases in the frequency of defaults or decreases
in recovery rates that could produce larger losses than its base
case. Fitch found that a 15% increase in the weighted average
foreclosure frequency (WAFF) and a 15% decrease in the weighted
average recovery rate (WARR) would lead to model-implied downgrades
of one notch for the class S notes and two notches for the class B
notes.
- Insufficient CE ratios to compensate for the credit losses and
cash flow stresses associated with the current ratings scenarios,
all else being equal.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Increase in CE ratios as the transactions deleverage that fully
compensates for the credit losses and cashflow stresses
commensurate with higher rating scenarios. Fitch tested an
additional rating sensitivity scenario by applying a 15% decrease
in the WAFF and a 15% increase in the WARR. This would lead to
model-implied upgrades of one notch for the class S notes and up to
10 notches for the class B notes.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
PEARL Mortgage Backed Securities 1 B.V.
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pool[s] and the transaction[s]. Fitch has not reviewed the results
of any third party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Fitch did not undertake a review of the information provided about
the underlying asset pool[s] ahead of the transaction's [PEARL
Mortgage Backed Securities 1 B.V.] initial closing. The subsequent
performance of the transaction[s] over the years is consistent with
the agency's expectations given the operating environment and Fitch
is therefore satisfied that the asset pool information relied upon
for its initial rating analysis was adequately reliable.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG CONSIDERATIONS
PEARL Mortgage Backed Securities 1 B.V. has an ESG Relevance Score
of '5' [+] for Human Rights, Community Relations, Access &
Affordability due to exposure to NHG guaranteed loans, which has a
positive impact on the credit profile, and is highly relevant to
the rating, resulting in lower loss levels due to the
non-application of Fitch's floored loss assumptions on NHG loans,
in line to Fitch's criteria, leading to implicitly higher rating.
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.
=========
I T A L Y
=========
QUARZO SRL 2024: Moody's Assigns (P)Ba1 Rating to Series D Notes
----------------------------------------------------------------
Moody's Ratings has assigned the following provisional ratings to
Notes to be issued by Quarzo S.r.l., Series 2024:
EUR [ ]M Series A1 Asset Backed Floating Rate Notes due June 2041,
Assigned (P)Aa3 (sf)
EUR [ ]M Series A2 Asset Backed Floating Rate Notes due June 2041,
Assigned (P)Aa3 (sf)
EUR [ ]M Series B Asset Backed Floating Rate Notes due June 2041,
Assigned (P)Baa1 (sf)
EUR [ ]M Series C Asset Backed Floating Rate Notes due June 2041,
Assigned (P)Baa3 (sf)
EUR [ ]M Series D Asset Backed Floating Rate Notes due June 2041,
Assigned (P)Ba1 (sf)
Moody's has not assigned a rating to the subordinated EUR[ ]M
Series J Asset Backed Fixed Rate Notes due June 2041 and EUR[ ]M
Series R Asset Backed Variable Return Note due June 2041.
RATINGS RATIONALE
The Notes are backed by a 6-month revolving pool of unsecured
consumer loans extended to obligors located in Italy by Compass
Banca S.p.A. ("Compass", unrated), a company fully owned by
Mediobanca S.p.A. (Baa1/P-2 Bank Deposits; Baa2(cr)/P-2(cr)).
Compass is acting as originator and servicer of the loans. This
represents the fourteenth issuance out of the Quarzo program.
The portfolio consists of approximately EUR814.99 million of loans
as of May 27, 2024 pool cut-off date. The Reserve Fund will be
funded to 1.30% of the Series A1, A2, B, C and D Notes' balance at
closing and the total credit enhancement for the Series A Notes
will be 15.27%.
The ratings are primarily based on the credit quality of the
portfolio, the structural features of the transaction and its legal
integrity.
According to Moody's, the transaction benefits from various credit
strengths such as: (i) a granular portfolio with good geographic
diversification; (ii) the fact that all loans are fully amortising
without any balloon payments; and (iii) extensive historical
performance data with regards to defaults and recoveries provided
by the originator.
In addition, the transaction contains structural features such as:
(i) an amortising liquidity reserve sized at 1.30% of Series A1,
A2, B, C and D Notes balance; (ii) principal to pay interest
mechanism for the Notes; (iii) a daily sweep of collections to the
Issuer account that partially mitigates the risk of commingling;
and (iv) a significant excess spread at closing.
Moody's notes that the transaction features some credit weaknesses
such as: (i) the fact that the pool is revolving for 6 months,
which could lead to an asset quality drift, although this is
mitigated to some extent by the portfolio concentration limits;
(ii) pro-rata payments on Classes A1/A2 - J Notes from the first
payment date; (iii) the weighted-average asset yield can decrease
to 10.5% during the revolving period, which has been considered in
the cash flow modelling of the transaction; (iv) 63% of the pool
comprises personal loans which historically exhibited higher
default rates than other consumer loan products; (v) an unrated
servicer; and (vi) an interest rate mismatch as all the loans are
fixed-rate, whereas the Notes are floating-rate (except for Classes
J and R Notes). Various mitigants have been included in the
transaction structure such as a back-up servicer facilitator which
is obliged to appoint a back-up servicer if certain triggers are
breached, as well as performance triggers which stop the revolving
period if breached. The interest rate mismatch is mitigated by a
fixed-to-floating balance guaranteed interest rate swap hedging
coupon payments for Classes A1/A2 to D Notes. Pro-rata payment
scheme will cease after the sequential redemption events are
triggered.
Moody's determined the portfolio lifetime expected defaults of
5.20%, expected recoveries of 15% and portfolio credit enhancement
("PCE") of 16% related to borrower receivables. The expected
defaults and recoveries capture Moody's expectations of performance
considering the current economic outlook, while the PCE captures
the loss Moody's expect the portfolio to suffer in the event of a
severe recession scenario. Expected defaults and PCE are parameters
used by Moody's to calibrate its lognormal portfolio loss
distribution curve and to associate a probability with each
potential future loss scenario in the ABSROM cash flow model to
rate Consumer ABS.
Portfolio expected defaults of 5.20% are lower than the EMEA
Consumer Loan ABS average and are based on Moody's assessment of
the lifetime expectation for the pool taking into account: (i)
historical performance of the loan book of the originator, split by
new and used vehicles, personal loans and other special purpose
loans; (ii) benchmarking with other similar transactions; and (iii)
other qualitative considerations, such as the 6-month revolving
period and the related portfolio concentration limits.
Portfolio expected recoveries of 15% are in line with the EMEA
Consumer Loan ABS average and are based on Moody's assessment of
the lifetime expectation for the pool taking into account: (i)
historical performance of the loan book of the originator, split by
new and used vehicles, personal loans and other special purpose
loans; (ii) the unsecured nature of the consumer loans in Italy;
and (iii) benchmarking with other similar transactions.
PCE of 16% is lower than the EMEA Consumer Loan ABS average and is
based on Moody's assessment of the pool which is mainly driven by:
(i) evaluation of the underlying portfolio, complemented by the
historical performance information as provided by the originator;
and (ii) the relative ranking to originator peers in the EMEA
Consumer loan market. The PCE level of 16% results in an implied
coefficient of variation ("CoV") of 54.6%.
The principal methodology used in these ratings was "Moody's
Approach to Rating Consumer Loan-Backed ABS" published in December
2022.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors that could lead to an upgrade of the ratings include: (i)
an upgrade of Italy´s local country currency (LCC) rating.
Factors that could lead to a downgrade of the ratings include: (i)
an increase in Italian's sovereign risk; (ii) increased
counterparty risk leading to potential operational risk of (a)
servicing or cash management interruptions and (b) the risk of
increased swap linkage due to a downgrade of a swap counterparty
ratings; and (iii) performance of the pool being worse than Moody's
expectations.
===================
L U X E M B O U R G
===================
INCEPTION HOLDCO: Fitch Assigns 'B+' Rating on New Term Loan B
--------------------------------------------------------------
Fitch Ratings has assigned Inception Holdco S.a.r.l's (B/Stable)
new term loan B (TLB) - issued by Inception Finco and Inception's
other subsidiary, IVI America, LLC - a final long-term rating of
'B+' with a Recovery Rating of 'RR3'. The TLB proceeds have been
used to refinance the group's existing senior secured debt
facilities in full.
The final rating is in line with the expected rating Fitch assigned
to the notes on 5 March 2024 (see Fitch Publishes Inception
Holdco's First-Time 'B'/Stable Rating; Rates New Term Loan
'B+(EXP)'), and the TLB terms broadly conform to the information
already received.
Inception's IDR is constrained by high, albeit easing, EBITDAR
leverage, which Fitch expects to fall to 7.0x or below in 2024, in
line with its rating, and by execution risk of the integration of
acquired companies. The IDR also reflects the group's global
leading position in the assisted reproduction techniques (ART)
market following the integration between IVIRMA and GeneraLife,
bolstered by its recent acquisition of Eugin Group, an US fertility
business. These acquisitions are a strategic fit, expand
Inception's geographical diversification across Europe, add market
share in the US, and should boost profitability from scale and
synergy extraction.
The Stable Outlook reflects its view that Inception will
consolidate its position in the global ART market and continue its
stable operating performance and sustained positive free cash flow
(FCF), mitigating its high financial leverage.
KEY RATING DRIVERS
Leverage-Neutral Refinancing: Inception's refinancing is neutral to
leverage and has slightly extended maturities and lowered its
interest burden. Fitch also expects improved liquidity, as the
group has upsized its revolving credit facility (RCF) to EUR234
million from EUR170 million, which remains undrawn at closing.
EBITDAR fixed-charge coverage should remain adequate for
Inception's rating, at 1.7x in for 2024, rising to above 2.0x
thereafter.
Meaningful Execution Risk: Fitch views Inception's combination with
GeneraLife and Eugin acquisition as boosting scale and
profitability. Synergies in integrated supplies, procurement and
centralised marketing and other functions from these acquisitions
mitigate inflationary pressure. Consequently, Fitch estimates
EBITDA margin to have been around 23% in 2023, before it widens
towards 25% by 2026, also boosted by organic growth expected from
new clinics.
Despite GeneraLife being largely integrated in 2023, the recent
addition of Eugin creates material execution risks. As both
businesses are large, integrating them could still lead to higher
integration costs with longer-than-expected completion beyond the
scheduled end-2024.
Resilient Profitability: Inception has high vertical integration
across its value chain, which provides a competitive advantage
against peers with a greater share of outsourcing, leading to its
stronger gross and EBITDA margins. Fitch expects profitability to
be sustained above 23% from 2025, when its acquisitions are fully
integrated and it ramps up new clinic openings. Clinics opened
since 2022 are showing positive operating leverage.
Strong Underlying FCF: Inception has strong cash flow generation
that benefits from its superior EBITDA margin, the sector's
inherent negative working-capital characteristics and a lower
interest burden post- refinancing, despite large annual capex of
4%-5% of revenue for greenfield expansion. Fitch expects its FCF
margin to strengthen towards mid-to-high single digits from 2025,
on much lower non-recurring outflows for its transformational
acquisitions. However, part of its FCF is likely to be reinvested
in greenfield projects or bolt-on M&A. Continuously weak or
negative FCF would put pressure on the ratings.
Global ART Market Leader: The business combination between IVIRMA
and GeneraLife in 2022 created the world's largest fertility
platform, eclipsing the scale of the closest competitor, while the
January 2024 acquisition of Eugin enhanced the group's revenue
diversification and capitalises on the higher growth cycle in the
US than Europe. It also strengthened its global brand visibility,
while its vast and established clinical network raises entry
barriers. The group's comprehensive fertility treatment service
offering, provided in uniformly equipped clinics, targets the
high-end market and delivers above-peer average success rates.
Resilient Business Model: Inception has shown resilient performance
during prior recessions, with some temporary volatility during the
Covid-19 pandemic due to travel disruption affecting international
patients. Its vertically integrated business model helps to secure
diverse supply from its gamete bank, which is one of the world's
largest. Above industry-average success rates are supported by
Inception's in-house genetic testing capabilities, underpinned by
robust R&D expertise, which further strengthens its resilient
business model.
Financial Policy Drives Ratings: Fitch estimates Inception's
EBITDAR gross leverage to have reached 7.7x at end-2023, which is
higher than a 'B' rating category. However, Fitch forecasts
leverage to moderate to 7.1x in 2024 and 5.7x by 2026, in line with
its rating, based on deleveraging potential and assuming the
absence of major debt-funded acquisitions, in line with a
conservative M&A funding policy and shareholder support of its
'buy-and-build' strategy.
Fitch regards Inception as a natural market consolidator and
therefore assume most of its FCF will be used to finance bolt-on
acquisitions. Fitch capitalises rents in the group's adjusted
leverage to reflect the lease contracts of its clinics and the high
likelihood of renewal on lease expiry. Fitch expects the group's
greenfield expansion and buy-and-build M&A strategy to allow for
modest deleveraging, subject to the ramp-up periods of new clinics,
acquisition economics and funding structure, execution risk and
synergy extraction.
Favourable Industry Trends: Fitch believes the group can expand
organically at a rate that meets or exceeds the market. This is
supported by rising ART demand, driven by socio-demographic and
medical factors that are increasingly preventing natural
conception. Fitch however believes that demand growth varies by
geography and its underlying regulatory framework.
Supportive Regulation: Overall Fitch views regulatory environment
as supportive in most operating markets, but uncertainty remains in
the US ahead of the presidential elections, where fitch treats the
possibility of a more restrictive cross-state regulatory shift in
the US as an event risk.
DERIVATION SUMMARY
Global sector peers tend to concentrate in the 'B'/'BB' range, with
local regulatory frameworks influencing the companies' funding
quality and operating profiles. Factors such as scale, services,
geographic diversification, mix of payors and diversification of
treatment areas contribute to the companies' distinct credit
profiles. Many providers pursue debt-funded M&A, given the
importance of scale and limited room for maximising organic
return.
Fitch rates Inception at the same level as French hospital
operator, Almaviva Developpement (B/Stable) and Finnish social care
and private healthcare provider, Mehilainen Yhtyma Oy (B/Stable),
whilst one notch higher than Median B.V. (B-/Stable), a
pan-European healthcare operator focused on rehabilitation and
mental health. All three peers have stable patient demand and some
ability to raise prices subject to regulations. The companies aim
for operating efficiencies, while investing in their clinic
networks to remain competitive.
The ratings of EMEA-based peers that are within the 'B' range tend
to be constrained by weak credit metrics amid highly leveraged
balance sheets that stem from persistent national and cross-border
market consolidation. The peers' EBITDAR leverage averages at
6.0x-7.0x and EBITDAR fixed-charge cover metrics are tight at
1.5x-2.0x. These metrics are further affected by the current high
interest-rate environment.
Fitch also compares Inception with lab-testing companies in light
of its genetic testing capabilities. These companies include Ephios
Subco 3 S.a.r.l. (B/Positive), Inovie Group (B/Negative) and
Laboratoire Eimer Selas (B/Negative). Lab-testing companies
tolerate higher leverage relative to their ratings, due to strong
operating and cash flow margins in combination with non-cyclical
revenue patterns, high visibility amid sector regulation, large
business scale and wide geographic footprint.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
- Organic and M&A-driven revenue CAGR at 12% for 2023-2027, with
annual M&A of around EUR40 million-EUR60 million during 2025-2027
- EBITDA margin improving towards 25% in 2026 on realised
efficiencies (2023: 23.1%). Lease expenses to grow in line with
revenue over 2024-2027
- Effective interest rate easing to 6.5% in 2026 and 6.0% in 2027
(2023: 8.6%), including hedging of the base rate for the EUR700
million TLB
- Working-capital changes at a slightly negative percentage of
sales
- Capex at around 4% of sales through to 2027
- Cash flow from non-operating activities mainly for one-off costs
in integration
- Cumulative FCF of around EUR115 million over 2025-2027, partly
reinvested in M&As
- RCF slightly drawn over the medium term to continue supporting
working-capital requirements
RECOVERY ANALYSIS
- The recovery analysis assumes that Inception would remain a going
concern (GC) in the event of restructuring and would be reorganised
rather than liquidated.
- A 10% administrative claim
- An GC EBITDA of EUR150 million from which Fitch calculates the
distressed enterprise value
- A distressed multiple of 6.0x, reflecting the group's leadership
in a niche market with attractive growth and demand fundamentals,
geographic diversification and the benefits of a vertically
integrated business model
- Its waterfall analysis generates a ranked recovery for senior
creditors in the 'RR3' band, indicating a final 'B+' instrument
rating for the senior secured facilities, one notch above the IDR.
The waterfall analysis output percentage on current metrics and
assumptions is 55% for the new senior secured debt, down from 57%
previously, following the upsizing of the RCF
- Fitch assumes that the enlarged RCF of EUR234 million (upsized
from the EUR200 million planned initially) would be fully drawn
prior to default, ranking equally with the new TLB of around EUR1
billion. Fitch also includes EUR122 million of local facilities at
operating companies, which are structurally senior to the secured
senior debt
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade:
- Successful execution of the medium-term strategy, with accretive
inorganic expansion leading to an increased scale ahead of its
rating case, and an EBITDA margin at or above 30% on a sustained
basis
- Continued favourable regulatory environment and positive market
demographics supporting the group's business model and competitive
advantage
- EBITDAR leverage below 5.5x on a sustained basis
- FCF margin remaining above 10% on sustained basis
- EBITDAR fixed-charge coverage sustained above 3.0x
Factors That Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade:
- Weakening credit profile due to reputational damage, adverse
changes or the prospect of adverse changes to the regulatory
framework or higher execution risk from business integration or
strategy implementation
- EBITDAR leverage remaining above 7.0x due to weaker trading or as
a result of aggressively debt-funded opportunistic M&A
- Inability to improve FCF margin to the low single digits due to
weaker operating performance or an aggressive capex policy towards
greenfield expansion
- EBITDAR fixed-charge coverage remaining below 2.0x
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity: Fitch regards liquidity as satisfactory
with EUR136 million in cash, which implies a cash balance of
slightly above EUR50 million if adjusted for the net cash outflows
related to the Eugin acquisition, and an undrawn enlarged RCF of
EUR234 million post-refinancing. The refinancing improves FCF
through a lower interest burden, despite negative FCF generation
forecast in 2024 due to non-recurring acquisition costs resulting
in lower cash position to around EUR25 million.
Overall, Fitch expects liquidity to remain satisfactory over the
next three years based on consistently higher positive FCF from
2025 (FCF margins above 5% expected under its forecasts). This will
allow Inception to accumulate above EUR50 million in cash by
end-2027, together with a broadly available RCF. Its forecasts
assume around EUR20 million of RCF drawings in 2024 and an
aggregated EUR150 million in acquisitions and earn-out payments
until 2027, alongside nominal dividends related to its clinic
platform.
Post-refinancing, debt maturities will be extended by one year to
2030 for the RCF and to 2031 for the TLB.
ISSUER PROFILE
Spain-based Inception is the world's largest fertility platform,
with 178 clinics across 14 countries in Europe and the Americas.
Entity/Debt Rating Recovery Prior
----------- ------ -------- -----
IVI America, LLC
senior secured LT B+ New Rating RR3 B+(EXP)
Inception Finco
S.a.r.l.
senior secured LT B+ New Rating RR3 B+(EXP)
TSM II LUXCO: Moody's Assigns First Time 'B2' Corp. Family Rating
-----------------------------------------------------------------
Moody's Ratings has assigned a B2 long-term corporate family rating
and B2-PD probability of default rating to TSM II Luxco 21 SARL,
the holding company of Netherlands-based multi-utility
infrastructure services provider VolkerWessels Verbindingen en
Netwerken B.V. ("ETT" or "the company"). Moody's Ratings has also
assigned a B2 rating to the proposed EUR465 million guaranteed
senior secured first lien term loan B (TLB) due 2031, the EUR100
million guaranteed senior secured revolving credit facility (RCF)
due 2030, and the EUR100 million guaranteed senior secured
guarantee facility due 2030, to be raised by TSM II Luxco 21 SARL.
The outlook is positive.
Proceeds from the proposed TLB together with EUR 324 million of
equity will be used to fund the proposed acquisition of a 100%
stake in ETT from Koninklijke VolkerWessels B.V. (VolkerWessels) by
private equity firm Triton Partners ("Triton") and management, and
to cover related transaction costs along with a locked-box funding.
The transaction, which values ETT at an EV/EBITDA multiple of 7.6x,
is expected to close in Q3 2024.
"The B2 rating with a positive outlook balances ETT's strong market
position in the Netherlands, good earnings visibility and
relatively low leverage, with customer concentration and the
downside risks related to the carve-out process," says Pilar
Anduiza, a Moody's Ratings AVP-Analyst and lead analyst for ETT.
RATINGS RATIONALE
ETT's B2 CFR is supported by its strong market position in the
Netherlands with a broad offering and good end-market
diversification, with presence in energy and utility (around 40% of
2023 revenue), connectivity (40%) and building installation (20%);
positive end-market fundamentals, particularly in the energy and
utility segment, supported by energy transition and growing
electricity needs; good revenue visibility on the back of a EUR4.8
billion order book covering 70% of cumulative revenues for
2024-2027; large share of revenue secured under framework
agreements and long-standing relationships with customers; large
share of contracts containing pass-through mechanisms which protect
the company's margins; an asset-light service business with a
flexible cost structure; and its good free cash flow generation
capacity.
The CFR is constrained by ETT's significant concentration in the
Netherlands, where the company generates 94% of revenue; a
relatively high, albeit expected to reduce over time, customer
concentration, with its largest customer generating around 20% of
revenues; its exposure to a certain degree of earnings volatility
due to end-market investment cycles and to the cyclical
construction market; exposure to competitive and fragmented
markets; and the execution risks associated with the carve-out from
Volker Wessels including a limited track record operating as a
separate entity. Although Moody's expects separation costs to be
manageable, there is a risk that the set-up of the stand-alone
structure could result in higher costs than initially anticipated.
Moody's forecasts that revenue will grow in the mid-to-high
single-digits in percentage terms over the next 12-18 months,
largely driven by the energy transition and growth in electricity
usage offset by a slowdown in the telecoms business as a result of
the decline in fiber build from 2024 onwards. Earnings visibility
is high with over 90% of the company's revenue already locked-in
for 2024.
The rating agency expects ETT will maintain moderate profitability
levels with Moody's adjusted EBITDA margins increasing towards 10%
over the next 12-18 months. Moody's notes that reported EBITDA
margins were already above expectations as of LTM April 2024 at
10.3%, according to the company. Moody's has assumed the costs to
set up its stand-alone structure following the separation from
VolkerWessels will be manageable, at around EUR10 million per year
in 2024 and 2025, and mainly related to the set-up of its own IT
infrastructure.
The company's Moody's adjusted leverage will be around 4.5x at year
end December 2024, pro forma for the transaction. Moody's forecasts
that ETT's leverage will reduce to well below 4.5x by 2025, mainly
driven by organic EBITDA growth.
Moody's also expects the company to keep a good liquidity profile
and maintain a prudent financial policy. In particular, Moody's
expects that the company will maintain a low leverage for the
rating category and does not expect significant debt-funded
acquisitions or shareholder distributions.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Governance considerations under Moody's General Principles for
Assessing Environmental, Social and Governance Risks Methodology
are relevant to ETT. Following the transaction, the company will be
fully owned by private equity firm Triton. Although private equity
owners typically exhibit more aggressive financial policies, ETT's
starting leverage of around 4.5x is relatively low for the rating
category. Additionally, Moody's does not expect significant
shareholder distributions or debt-funded acquisitions and
highlights Triton's expertise as a shareholder with an established
tracked record in the industry as well as the company's experienced
management team.
Social considerations for ETT include the company's large workforce
needs and work site hazards which could pose health and safety
risks. However, training including its in-house educational
platform, Vakshool, and low turnover reflect its strong commitment
to talent retention.
LIQUIDITY
Moody's expects ETT to maintain a good liquidity pro forma for the
transaction supported by good free cash flow generation. Although
the assumed starting cash balance of EUR30 million is relatively
low, Moody's expects that ETT will be FCF breakeven in 2024 and
generate positive FCF of around EUR35 million in 2025.
The company also benefits from a fully available EUR100 million
RCF; and a long debt maturity profile with no significant
maturities until 2030, when the RCF matures.
Moody's expects these sources of liquidity to provide headroom to
cover high intra-year working capital swings of EUR30-40 million
historically and capital spending needs over the next 12-18
months.
The debt structure is covenant-lite, with one springing maintenance
covenant set at 7.3x senior secured net leverage to be tested only
if 40% of more of the RCF facility is drawn. The company will
likely maintain ample headroom under this covenant over the next
12-18 months.
STRUCTURAL CONSIDERATIONS
Pro forma for the transaction, ETT's capital structure will consist
of a EUR465 million senior secured Term Loan B, a EUR100 million
senior secured RCF and a EUR100 million senior secured guaranty
facility, all rated in line with the CFR. The B2-PD PDR is at the
same level as the CFR, reflecting the use of a standard 50%
recovery rate as is customary for capital structures with
first-lien bank loans and a covenant-lite documentation.
The facilities rank pari passu, will benefit from upstream
guarantees from the group's restricted subsidiaries representing at
least 80% of consolidated EBITDA, and will be secured by intragroup
receivables, bank accounts and share pledges
COVENANTS
Moody's has reviewed the marketing draft terms for the new credit
facilities. Notable terms include the following:
Guarantor coverage will be at least 80% of consolidated EBITDA
(determined in accordance with the agreement) and include all
companies representing 5% or more of consolidated EBITDA. Companies
incorporated in Russia, China and Turkey are not required to
provide guarantees or security, and are excluded from the coverage
test. Security will be granted over key shares, bank accounts and
receivables.
Incremental facilities are permitted up to the greater of EUR130
million and 1.00x consolidated EBITDA, and amounts under the senior
secured leverage basket can be made available in this way.
Unlimited pari passu debt is permitted up to a senior secured
leverage ratio of 3.80x, and unlimited unsecured debt is permitted
subject to a 2.00x fixed charge coverage ratio. Any restricted
payments is permitted if total net leverage is 3.75x or lower.
Asset sale proceeds are only required to be applied in full
(subject to exceptions) where Senior Secured Net Leverage Ratio is
3.10x or greater.
Adjustments to consolidated EBITDA include the full run rate of
cost savings and synergies, capped at 25% of consolidated EBITDA
and believed to be realisable within 24 months of the relevant
event.
The proposed terms, and the final terms may be materially
different.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects the rating agency's expectation that
the company's credit metrics will reach levels commensurate with a
B1 rating by 2025, with Moody's adjusted leverage reducing towards
4.0x. The rating and outlook also incorporate the expectation that
ETT will generate positive free cash flow and maintain a good
liquidity profile.
Moody's assumed that the company will build a track record of
operating as a separate entity while executing on its business plan
and will run the business under a prudent financial policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the rating could develop if Moody's adjusted
debt/EBITDA reduces below 4.5x on a sustained basis, Moody's
adjusted EBITA/Interest expense increases above 2.5x and FCF/debt
moves to the high-single digits in percentage terms, while
liquidity remains good. An upgrade will also require a track record
of operating as a separate entity with a prudent financial policy
and sustained strong relationships with key customers.
Downward pressure on the rating could develop if Moody's adjusted
debt/EBITDA increases above 5.5x on a sustained basis, if Moody's
adjusted EBITA/Interest expense declines well below 2.0x, FCF/Debt
weakens or turns negative and liquidity deteriorates. The rating
would also come under pressure if the company exhibits a more
aggressive financial policy such as embarking in large debt-funded
acquisitions or shareholder distributions.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Construction
published in September 2021.
COMPANY PROFILE
ETT, headquartered in the Netherlands, is a leading end-to-end
multi-utility installation and technical service provider in the
energy & utility, connectivity and building installation services
in the Netherlands. The company offers integrated solutions
spanning the value chain from feasibility studies, advice, design,
installation and realization to maintenance and service management.
In April 2024, Triton Partners reached an agreement to acquire 100%
stake in the company from Koninklijke VolkerWessels B.V.
The company has over 3,200 employees and for the LTM ended March
2024, it generated revenues of around EUR1,254 million and company
adjusted EBITDA of EUR132 million (post IFRS-16).
=====================
N E T H E R L A N D S
=====================
KONINKLIJKE KPN: Moody's Affirms 'Ba2' Junior Subordinate Rating
----------------------------------------------------------------
Moody's Ratings has affirmed the Baa3 senior unsecured ratings of
Koninklijke KPN N.V. ("KPN" or "the company"), the leading
integrated telecommunications provider in the Netherlands.
Concurrently, Moody's has affirmed the company's (P)Baa3 senior
unsecured MTN program and (P)Ba1 subordinated MTN program rating,
as well as the Ba2 junior subordinate rating and the Prime-3 (P-3)
short-term issuer rating. The outlook was changed to positive from
stable.
"The outlook change to positive reflects KPN's track record of
improved operating performance over the past few years, which has
translated into high and sustainable EBITDA margins, leading to
solid credit metrics for the category, particularly when compared
with peers," says Carlos Winzer, a Moody's Ratings Senior Vice
President and lead analyst for KPN.
"It also reflects management's strong track record in executing a
well-crafted strategy, and in managing the company's financial
profile through a stable and predictable financial policy," adds
Mr. Winzer.
RATINGS RATIONALE
KPN's Baa3 senior unsecured rating is supported by the company's
(1) leading position in the Dutch market; (2) integrated business
model, with a strong quality network; (3) track record of improved
operating performance with significant margin growth and sustained
positive revenue growth; (4) good free cash flow generation driven
by its high margins and moderate capex requirements; (5) its
predictable financial policy that balances shareholder remuneration
and creditor protection, with a target net reported leverage ratio
below 2.5x (equivalent to Moody's adjusted leverage of close to
3x); and its (6) adequate liquidity risk management.
These factors are balanced against: (1) the highly competitive
environment in The Netherlands, although it is more stable than
other European markets owing to the 3-player market structure; (2)
the company's geographic concentration; (3) the complexity caused
by the off-balance sheet financing of part of the fiber network
rollout through the Glaspoort JV, which will likely add 0.2x of
leverage if it is consolidated; and (4) a generous shareholder
remuneration policy that aims at distributing via dividends and
share buybacks any excess free cash flow generation.
KPN's operating performance has progressively improved over the
past few years despite the competitive intensity in the Dutch
telecom market. However, the 3-player market structure supports a
rational market behavior, which should translate into sustainable
revenue growth, slightly below management's guidance of about 3%
CAGR and EBITDA margin of about 48%.
KPN has managed to revert the declining trend in its structurally
challenged business segment, supported by the strong performance in
the small and medium enterprises segment but also, more recently,
in the large corporates segment.
The company also benefits from a good quality network and it is now
accelerating the fiber network rollout through Glaspoort, an
off-balance sheet 50/50 JV with Drepana Investments Holding B.V.,
an investment entity managed by APG. KPN expects to increase its
fibre-to-the-home (FTTH) coverage in the country to around 80% by
2026 from 50% in 2023, with annual capex of around EUR1.2 billion.
The JV increases the complexity of the group structure, given that
the proportionate consolidation of the JV would increase KPN's
leverage gradually as it raises the required funds for the FTTH
expansion. However, Moody's Ratings estimates that the leverage
impact will be modest, of around 0.1x by 2026 and 0.2x by 2027.
KPN's leverage has progressively reduced over the past few years,
from 3.6x in 2017 to 2.8x in 2023, a level close to the 2.75x
threshold for upgrade. This ratio is particularly strong when
compared with some rated peers in the rating category.
Given the company's predictable financial policy and planned use of
any excess cash flow to remunerate shareholders, Moody's Ratings
expects limited further deleveraging from current levels. The
rating agency expects KPN's adjusted debt/EBITDA to remain broadly
stable below 3.0x over the next two years, mainly because of its
stable cash flow, which will contribute to partially pay for the
acquisition of spectrum expected in Q3 2024.
LIQUIDITY
KPN's liquidity is adequate and is supported by cash and short-term
investments of EUR1,314 million as of March 2024; full availability
under its EUR1.0 billion credit facility maturing in 2028, with no
financial covenants; and internally generated cash flow (defined as
EBITDA net of cash interest, tax obligations and dividends
received) of around EUR2.2 billion per year. These sources compare
favorably with cash requirements, which consist of annual capital
spending of around EUR1.2 billion, cash dividends of around EUR700
million per year, share buybacks of EUR200 million, the expected
spectrum auction costs in 2024, and around EUR1 billion of debt
maturities over 2024-2025. Moody's Ratings notes that while
liquidity risk management is adequate, it is relatively weaker than
some of KPN's rated peers. The company has an average cash balance
of around EUR500 million.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook on the ratings reflects Moody's Ratings
expectation that the company will continue to report a solid and
stable operating performance, supported by a rational market
environment, which underpins EBITDA growth and stable cash flow
over the next 12-18 months. This will lead to a sustained
Moody's-adjusted leverage ratio of less than 3.0x over the
projected period.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be upgraded if KPN continues to report a solid
operating performance, with positive revenue growth, sustained high
margins and good free cash flow generation (before share buybacks),
leading to an adjusted debt/EBITDA ratio below 2.75x and an
adjusted RCF/net debt ratio trending towards 25%.
The rating could be downgraded if KPN's underlying operating
performance weakens significantly with a deterioration in its
credit metrics, including RCF/net adjusted debt falling below 20%
or adjusted debt/EBITDA rising above 3.5x on an ongoing basis.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was
Telecommunications Service Providers published in November 2023.
COMPANY PROFILE
Koninklijke KPN N.V. (KPN) is the leading integrated provider of
telecom services in the Netherlands. The company offers fixed and
mobile services, and fixed and mobile broadband internet and TV to
retail consumers and wholesale clients. The company also supplies
mobile, wireline network and ICT services to business customers in
the Netherlands.
In 2023, KPN generated adjusted revenue from continuing operations
of EUR5.4 billion and adjusted EBITDA of EUR2.6 billion. The
company is listed on Euronext Amsterdam.
TSM II LUXCO: S&P Assigns Preliminary 'B+' LT ICR, Outlook Stable
-----------------------------------------------------------------
S&P Global Ratings assigned its preliminary 'B+' long-term issuer
credit rating to TSM II Luxco 21 S.a.r.l., VolkerWessels
Verbindingen en Netwerken B.V. (V&N Group or ETT) Group's holding
company. S&P also assigned its preliminary 'B+' issue rating to the
proposed EUR465 million term loan B. The '3' recovery rating
reflects its expectations of meaningful recovery (50%-70%; rounded
estimate 65%) in the event of a default.
The stable outlook reflects S&P's view that V&N Group will generate
strong organic growth in its energy and utility business as well as
its installation business due to favorable trends in its
addressable markets with a steady increase in EBITDA margins,
leading to adjusted debt to EBITDA of 4.0x-4.5x and positive free
operating cash flow (FOCF) over the next 12 months.
Private equity firm Triton Partners has acquired 100% of V&N Group,
a Netherlands-based infrastructure, building, and installation
service provider. Triton Partners acquired V&N Group as a result of
a carve-out from its previous owners VolkerWessels, via new holding
company TSM II Luxco 21 S.a.r.l. The acquisition was funded by a
new EUR465 million term loan B and an equity contribution of
EUR323.9 million from Triton Partners.
Private equity firm Triton Partners created holding company TSM II
Luxco 21 S.a.r.l. to acquire 100% of V&N Group. The new entity is
formed by the carve-out of the V&SH, Telecom, and Homij businesses
from previous owner Koninklijke VolkerWessels B.V (VolkerWessels).
To finance the transaction, TSM II Luxco 21 S.a.r.l. will issue a
EUR465 million term loan B, supported by EUR100 revolving credit
facility (RCF), which will remain undrawn at close of the
transaction, and a EUR100 million guarantee facility. Triton
Partners is also injecting EUR323.9 million new equity to support
the transaction. S&P said, "We note EUR275.4 million of preference
shares are also present in the capital structure, which sit at the
level of the entity. We treat these preference shares as equity and
exclude them from our leverage and coverage calculations because we
see an alignment of interest between noncommon and common equity
holders."
Favorable industry trends will support organic growth, somewhat
offset by a runoff in demand for fiber connectivity services in the
Telecoms segment. S&P said, "We expect V&N Group's V&SH and Homij
business to benefit from several industry tailwinds related to
energy transition or sustainability, rising electricity needs,
increased regulatory standards for energy efficient buildings, and
further supported by the housing shortage and ageing residential
infrastructure. We expect this will result in organic growth of 13%
for V&SH and around 5.4% growth in the Homij business in 2024.
However, with the fiber-to-the-home rollout peaking in 2024, we
expect revenue to decline by around 3.7% in its Telecom business in
the short term, however fiber maintenance and intensifying demand
for private connectivity is expected to bolster growth in the long
term."
High revenue visibility through its strong orderbook and
longstanding relationship with its blue-chip client base. Around
53% of V&N Group's total contracts are long-term framework
agreements with inflation protection on both labor and materials
costs, which helps to secure future orders with price increases.
Given its long-term partnership with a blue-chip client base, the
group has a strong orderbook that helps provide revenue visibility
and also attract a talented workforce, which is not easily
available. Historically, the group has a good relationship track
record with its key customers, with most its contracts being
extended or renewed.
S&P said, "We see V&N Group's geographical and client concentration
as constraints to our business risk profile. The group has a high
geographical concentration in the Netherlands, where it generates
around 95% of its revenue, with the remainder coming from Germany.
V&N Group also has high client concentration, with its top five
customers accounting for 35% of its 2023 revenues. We understand
that the group's dependence on some of its largest clients will
reduce--especially in its Telecom business, as the rollout of fiber
will start to decrease--and the company may expand geographically
depending upon its client's needs. However, we believe the current
geographic and customer concentration makes the group less
resilient than larger, more geographically diversified service
providers to which we assign a stronger business risk profile.
"We anticipate EBITDA margin improvement which, coupled with
negative net working capital and capital expenditure (capex) needs,
will support positive cash flow generation. In our view, V&N Group
will continue to improve its EBITDA margin. This will be supported
by its continued disciplined approach in contract management, both
with its long-term framework agreements, which have indexation
clauses, and project contracts, which have limited cost exposure
due to their shorter pass-through cycle for inflation. This is in
addition to operational efficiencies and overhead optimizations
that we expect from the carve-out. We forecast a steady increase in
the group's EBITDA margin to 9.5%-9.8% over 2024-2025. To reach S&P
Global Ratings-adjusted EBITDA, we deduct exceptional costs from
the company-calculated EBITDA. The group has low capex and negative
net working capital, which support its cash flows. Yet, V&N Group
experienced higher-than-usual capex in 2023 due to investment in
drilling equipment and the implementation of new software
development projects. We forecast positive FOCF of about EUR35
million in 2024, including transaction costs, and EUR65 million in
2025, together with an adjusted funds from operations (FFO) cash
interest coverage of 2.9x in 2024 and 3.3x in 2025.
"The preliminary rating on TSM II Luxco 21 S.a.r.l. is constrained
by its financial sponsor ownership. We forecast V&N Group's
adjusted debt to EBITDA will be 4.5x at year-end 2024 and decline
to 4.1x in 2025, on the back of EBITDA growth. However, its
financial-sponsor ownership and future acquisitions may limit
deleveraging. Additionally, although we see integration risk as
limited and do not expect meaningful synergies from the combination
of the three business lines, the group has been operating together
since July 2023 and therefore has a limited track record of
operating on a stand-alone basis, following the carve-out from the
family-owned company.
"The final ratings will depend on our receipt and satisfactory
review of all final transaction documentation. Accordingly, the
preliminary ratings should not be construed as evidence of final
ratings. If we do not receive final documentation within a
reasonable time frame, or if final documentation departs from the
materials we reviewed, we reserve the right to withdraw or revise
our preliminary ratings. Potential changes include, but are not
limited to, the use of loan proceeds, maturity, size and conditions
of the loans, financial and other covenants, security, and
ranking.
"The stable outlook reflects our view that V&N Group will generate
strong organic growth in its energy and utility business, as well
as its installation business, due to favorable trends in its
addressable markets with a steady increase in EBITDA margins,
leading to adjusted debt to EBITDA of 4.0x-4.5x and positive FOCF
over the next 12 months."
S&P could lower the rating in the next 12 months if it expects V&N
Group's S&P Global Ratings-adjusted debt to EBITDA to rise and
remain above 5x, or if its FOCF were to weaken, likely because of:
-- A more aggressive financial policy involving debt-funded
shareholder returns or acquisitions,
-- Weaker trading performance, or
-- Integration missteps or higher-than-expected costs to operate
the company on a stand-alone basis.
Although unlikely in the near term, S&P could consider taking a
positive rating action if:
-- Financial sponsor ownership reduces and the group maintains a
less aggressive approach to debt, such that S&P does not anticipate
debt to EBITDA to be above 4x, or
-- The company improves its scale and diversity while operating
performance and margins continued to improve.
S&P said, "Governance factors are a moderately negative
consideration in our credit analysis of V&N Group. Our assessment
of the company's financial risk profile as aggressive reflects
corporate decision-making that prioritizes the interests of the
controlling owners, in line with our view of most rated entities
owned by private-equity sponsors. Our assessment also reflects
generally finite holding periods and a focus on maximizing
shareholder returns."
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R O M A N I A
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MAS PLC: Moody's Affirms 'Ba2' CFR & Alters Outlook to Negative
---------------------------------------------------------------
Moody's Ratings has affirmed the Ba2 corporate family rating of MAS
P.L.C. (MAS or the company). At the same time the backed senior
unsecured rating and the respective notes issued by MAS Securities
B.V., guaranteed by MAS, have been downgraded to Ba3 from Ba2. The
outlook on both entities changed to negative from stable.
The outlook change to negative reflects increasing refinancing risk
for MAS bonds maturing in May 2026, highly linked to the
uncertainty of preferred equity drawings by the development joint
venture (DJV), alongside reducing financial flexibility through
encumbrance of assets. MAS will need to increase its funding
sources to address future refinancing needs in case of further
drawings by the DJV. At the same time the affirmation of the Ba2
CFR recognises the steps taken by management to address funding
needs, the robust operating performance of MAS, reflected in good
rental growth and continued high occupancy levels preserving
adequate credit metrics for the current rating category.
The downgrade of the backed senior unsecured notes is a result of
the increasing subordination to secured debt, alongside reducing
unencumbered property assets to cover the unsecured debt.
RATINGS RATIONALE
MAS rating remains supported by the company's EUR1 billion good
quality directly held asset portfolio, mainly consisting of well
performing, convenience-led retail assets in Romania (Baa3 stable).
Footfall and sales at the company's retail assets develop well,
reflecting in stable OCRs and growing rental income. The company's
value- and earnings-based leverage ratios remain low on the back of
its conservative financial policy. After overcoming mid-term
refinancing requirements, the capital structure can be brought to a
sustainable level once the DJV stops requiring further funding from
MAS' perspective.
The company's rating is predominantly constrained by its preferred
equity commitment to and the complexity created by its 40% stake in
PKM Development Ltd, the DJV, with Prime Kapital. Prime Kapital in
turn is owned by a number of larger shareholders in MAS that
previously held their MAS shares through Prime Kapital. The growing
preferred equity exposure in the DJV does not directly contribute
to addressing refinancing needs for MAS' main bond maturity in May
2026. The potential preferred equity contributions reduce funds
available to address refinancing needs on the bonds.
MAS' management has clearly articulated the need to cater for
refinancing and preferred equity funding requirements. MAS intends
to address refinancing needs through a combination of retaining
earnings through dividend cancellation and new secured loans on its
existing asset portfolio. While those activities are positive and
partially within the company's control, the volume of funding
needed is uncertain given uncertain volumes of drawings under its
commitment to the DJV. Further uncertainty exists with respect to
the ability to generate sufficient secured debt proceeds via
encumbering MAS existing unencumbered asset base to pay down the
maturing bond and the full potential DJV drawings, alongside
retained cash flows. Consequently the credit risk has increased as
long as other forms of liquidity generation are not used, such as
equity issuance or disposal of assets. MAS has started to exchange
existing bonds into longer dated privately placed bonds, which
reduces the 2026 refinancing needs. So far equity raises or
disposal of assets have not been used in larger scale by the
company, but management has indicated these as possibilities in
their latest market communications.
Other challenges contain macroeconomic uncertainty and inflationary
pressures across Europe that weigh on consumer confidence, while
Romania is less affected by those broader economic trends. MAS'
exposure to the less liquid investment markets in CEE entails
higher risks in a downturn, while property valuations for now were
less affected than Western European peers given higher starting
yields. Another long-term risk is the sectorwide structural
currency mismatch that is embedded in the leases.
RATIONALE FOR THE OUTLOOK
The negative outlook reflects increasing refinancing risk for MAS
bonds maturing in May 2026, highly linked to the uncertainty of
preferred equity drawings by the DJV, alongside reducing financial
flexibility through encumbrance of assets. The negative outlook
also considers uncertainty whether MAS will manage to increase its
liquidity headroom even in case of further drawings by the DJV.
Moody's expect to resolve the outlook in the next 6 months.
LIQUIDITY
Liquidity for MAS is adequate in the next 12 to 18 months, but
highly depends on drawings on commitments by the DJV and could
deteriorate quickly in case all legally contracted drawings were
made. MAS does not have major debt repayment or capital spending
commitments ahead of the May 2026 bond maturity, outside the
undrawn EUR20 million RCF expiring in November 2025. On December
31, 2023, MAS had EUR81.8m cash and receives stable operating cash
flows to cover expected outflows, in particular on the expected
drawing requests from the DJV. In an extreme scenario of full
commitment drawings within the boundaries of the contract,
liquidity would deteriorate quickly.
STRUCTURAL CONSIDERATIONS
The backed senior unsecured bonds are rated one notch lower than
the CFR. Moody's expect MAS to use the vast majority of its
directly held property assets to obtain secured loans to create a
liquidity buffer for the 2026 bond maturity. Therefore the majority
class of debt will be secured debt, which the CFR refers to. Given
the coverage of unsecured debt by unencumbered property assets will
decline materially, the notching reflects the subordination of the
senior unsecured debt to secured creditors.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
Moody's could consider upgrading MAS' rating if the company:
-- removes refinancing risk related to its May 2026 bond maturity
-- retain sufficient financial flexibility and unencumbered
property assets
-- continues to grow the scale of its directly-owned portfolio
while reducing the complexity of its corporate structure with
increasing control over its cash requirements
-- continues with a solid operating performance
-- maintains Moody's-adjusted gross debt/assets below 35%, net
debt/EBITDA below 5x and a Moody's-adjusted fixed charge coverage
ratio of more than 3x
WHAT COULD CHANGE THE RATINGS DOWN
The rating downgrade may occur if:
-- MAS fails to show meaningful progress in shoring up liquidity
and secure alternative refinancing options, well ahead of the
maturity of its senior unsecured notes in May 2026
-- MAS is required to facilitate significant further preferred
equity injections to the DJV and hence fails to retain cash for its
own refinancing purposes
-- The company reduces its financial flexibility by encumbering
the majority of its properties without fully covering the bond
maturity in May 2026
-- The company breaches its financial policy or Moody's-adjusted
gross debt/assets goes above 40%, net debt/EBITDA is sustained
above 6x, or fixed-charge coverage ratio falls below 3x
-- The operating performance in the portfolio deteriorates
Any of the factors can cause a rating downgrade.
The principal methodology used in these ratings was REITS and Other
Commercial Real Estate Firms published in February 2024.
COMPANY PROFILE
MAS P.L.C. (MAS) is a CEE focused retail real estate landlord and
operator, with a focus in Romania. Most of its EUR1 billion
directly held assets are open air or enclosed malls. The company
also owns a 40% stake in PKM Development Ltd, the DJV established
with Prime Kapital, which provides construction and development
functions to the DJV.
===========
R U S S I A
===========
UZBEKISTAN: S&P Affirms 'BB-/B' Sovereign Credit Ratings
--------------------------------------------------------
On May 31, 2024, S&P Global Ratings affirmed its 'BB-/B' long- and
short-term foreign and local currency sovereign credit ratings on
Uzbekistan. The outlook is stable.
The transfer and convertibility (T&C) assessment remains 'BB-'.
Outlook
The stable outlook considers Uzbekistan's favorable growth
prospects over the next 12 months and risks from increasing
external and net general government debt, albeit from moderate
levels.
Downside scenario
S&P could lower the ratings if external and government debt
continue to increase rapidly, raising fiscal and balance of
payments risks, especially if the anticipated benefits from related
projects do not materialize as planned.
Upside scenario
S&P could raise the ratings if reforms lead to
stronger-than-expected medium-term growth potential, with positive
spillover effects for the fiscal and external positions.
Rationale
Uzbekistan has started a second phase of reforms as part of its
economic modernization agenda that began in 2017. To address issues
regarding energy security, the high fiscal cost of subsidies, and
rising gas imports, the government has raised electricity and gas
tariffs since October 2023 after several years of delays.
Authorities are also working with international financial
institutions and foreign investors, largely from the Middle East
and China, to attract and finance investment into electricity
generation, green energy, gas production, and mining. We expect
these reforms, along with a renewed push for more market-friendly
policies, will drive strong annual growth exceeding 5% on average
through 2027.
However, sizable investments under the development plans are
driving up Uzbekistan's net general government and external debt.
Following a record high current account deficit of 8.6% of GDP in
2023, we forecast still-elevated deficits of 7.6% of GDP annually
on average over 2024-2027, given continued import growth.
Positively, Uzbekistan's net general government debt remains
moderate in a global comparison—S&P anticipates it will reach
31.7% of GDP by the end of 2024.
S&P said, "Overall, our ratings on Uzbekistan are supported by the
economy's still-moderate external debt and total government debt.
The sovereign's fiscal and external stock positions have
historically benefited from the policy of transferring some revenue
from commodity sales to the sovereign wealth fund, the Uzbekistan
Fund for Reconstruction and Development (UFRD).
"Our ratings are constrained by Uzbekistan's low economic wealth,
measured by GDP per capita, and low--albeit improving--monetary
policy flexibility. In our view, policy responses are difficult to
predict, given the highly centralized decision-making process and
less developed accountability and checks and balances between
institutions."
Institutional and economic profile: Growth momentum will remain
strong, notwithstanding significant external risks
-- S&P forecasts that economic growth will average 5.2% over
2024-2027, slightly below the 6.0% of 2023.
-- Economic and governance reforms, including planned hikes to
energy tariffs, will support the country's investment prospects.
-- Decision-making will remain centralized and the perception of
corruption high, although improving, in S&P's view.
From 2021-2023, Uzbekistan saw high real GDP growth of about 6.4%
on average annually, and we expect prospects to remain strong,
supported by public and private investment. Uzbekistan's growth is
heavily investment led, with one of the highest investment-to-GDP
ratios globally, at about 43% last year. Under the
"Uzbekistan-2030" strategy, the government and public entities are
fueling investments in the energy, transport, telecommunications,
agriculture, and tourism sectors, while moving ahead with energy
sector reforms, privatizations, and improving fiscal policy.
After several years of delays, the government introduced higher
electricity and gas tariffs for businesses in October 2023,
expanding those to households in May 2024. They aim to almost reach
cost recovery by 2027. The government also plans to diversify and
modernize the generation of electricity, particularly green energy,
mainly through public-private partnerships (PPPs). For instance,
Saudi Arabia's ACWA Power is investing heavily in Uzbekistan to
install 5,000 megawatts (MW) of electricity, with a country target
to achieve 25,000 MW of renewable energy by 2030. Uzbekistan is
also expanding production of copper, gold, silver, and uranium to
boost the export base.
Despite the increasing energy tariffs and high interest rates, we
consider that government stimulus measures, such as value-added tax
refunds and regulated prices on several consumer goods, should
maintain consumption growth. However, to reduce the high import
growth, authorities removed import tax exemptions on cars and
almost 40 essential food items introduced in 2023.
Uzbekistan's economy continues to weather the spillover effects
from the Russia-Ukraine war reasonably well, even as remittance
inflows and money transfers from Russia decrease from the highs of
2022. Remittance inflows declined one-third in 2023 to about $11
billion (11% of GDP), but were still about 40% higher than in 2021,
and increased 9% year on year in first-quarter 2024. Russia remains
Uzbekistan's largest remittance source, at 78% of total remittances
in 2023. In addition, total trade with Russia increased about 16%
in first-quarter 2024 from the same period in 2023. Given
Western-alliance-led sanctions on Russia, Uzbekistan's exports to
Russia have increased to meet increasing demand. In addition,
Uzbekistan signed a two-year deal with Russia's Gazprom in October
2023 to import 9 million cubic meters of gas per day.
In S&P's view, the risk of secondary U.S. and EU sanctions on Uzbek
companies doing business with Russia remains, although the
government tries to comply with sanction requirements. For example,
the U.S. and EU have sanctioned several Uzbek companies involved in
trading electronic and telecommunications equipment and goods in
the defense industry. In response, the government is implementing
enhanced diligence processes, automated screening measures, and
stress testing.
S&P said, "Despite strong growth, our sovereign ratings on
Uzbekistan are constrained by low GDP per capita when compared
globally, at a projected $2,600 in 2024. The country benefits from
favorable demographics, given a young population; almost 90% are at
or below working age, which presents an opportunity for
labor-supply-led growth. However, it will remain challenging for
job growth to match demand, in our view. Weakness in the Russian
economy, where most of Uzbekistan's permanent and seasonal
expatriates are employed, could further exacerbate this issue."
A new constitution adopted in May 2023 lengthened the presidential
term limit to seven years from five and allows the current
president to remain in power until 2037. The incumbent president,
Shavkat Mirziyoyev, won the election held July 9, 2023, that
followed the constitutional referendum. He secured 87% of the
votes. International observers noted a lack of competition in the
election. In S&P's view, government policy responses can be
difficult to predict in Uzbekistan, considering the centralized
decision-making process and limited checks and balances between
institutions, despite reforms. Significant uncertainty over future
succession remains.
Flexibility and performance profile: Government and external debt
continue to rise
-- S&P expects net general government debt will reach 38% of GDP
by 2027, compared to a net asset position in 2017.
-- S&P forecasts Uzbekistan's current account deficits will
average 7.6% of GDP through 2027, funded primarily through
concessional external debt and net foreign direct investment (FDI)
to a smaller extent.
-- Despite improvements in monetary policy in recent years, S&P
still views the central bank's operational independence as
constrained, and loan dollarization remains elevated at over 40%.
To mitigate the fallout from the Russia-Ukraine war and high food
prices in recent years, the government increased social spending
and wages in 2023. The fiscal deficit increased to 5.5% of GDP,
significantly higher than the budgeted 3.0%. From 2024, S&P expects
gradual fiscal consolidation on the back of subsidy reforms,
better-targeted social spending, and the removal of some tax
exemptions. Authorities estimate savings of about 1 percentage
point of GDP this year from higher energy and gas tariffs. As the
government works to reduce the gray economy and improve operations
at government-related entities (GREs), we expect the tax base will
gradually increase.
The government expects the fiscal deficit to drop to 4% of GDP in
2024 and 3% in 2025. S&P expects fiscal consolidation to be
slightly slower, with the deficit projected to reach 3.2% of GDP by
2027. Additionally, risks to its projections include potentially
higher expenditure on social protection and the reliance on the
sale of commodities, such as gold, the prices of which can be
volatile. Social spending, including wages, makes up about 50% of
government expenditure and can be difficult to adjust for political
reasons.
S&P said, "We expect gross government and government-guaranteed
debt will increase to about 46% of GDP in 2027 from 40% in 2023. We
include government-guaranteed debt in general government debt
because of the close links with GREs. The state debt law approved
by the president in April sets a permanent debt ceiling at 60% of
GDP, and the application of corrective measures if it breaches 50%.
There are also limits on annual borrowing, PPP debt levels, and
state guarantees. The state is allowed to borrow external debt of
up to $5 billion in 2024.
"We think there is some risk that nonguaranteed GRE and PPP debt,
totaling about 8% of GDP in 2023, could crystallize on the
government's balance sheet. GREs have significantly increased
borrowings in recent years, particularly in foreign currency, to
finance energy and infrastructure projects. In our view, they could
face issues in repaying this debt if some projects fare worse than
expected, or if there are lapses in management or supervision."
To reduce exposure to fluctuations in currency movements and build
domestic capital markets, the government is increasing domestic
borrowing. The proportion of domestic debt to total debt stood at
17% as of March 31, 2024, up from 11% at year-end 2022. The
government recently issued U.S.-dollar-denominated Eurobonds in May
2024 of $600 million, euro-denominated Eurobonds of EUR600 million
($652 million), and bonds worth Uzbek sum (UZS) 3 trillion (about
$236 million). The government paid 16.63% for UZS-denominated bonds
for three years, with repayments in U.S. dollars. As the proportion
of domestic and commercial debt increases, S&P expects borrowing
costs will also rise, but from a low base. About 90% of external
debt is on concessional terms.
The government's liquid assets, at 13% of GDP in 2023, is down from
37% in 2017. They mostly include assets of the UFRD, which was
founded in 2006 and initially funded with capital injections from
the government; and revenue from gold, copper, and gas sales above
certain cutoff prices until 2019. S&P includes only the external
portion of UFRD's assets in our calculation of government liquid
assets because we view the domestic portion, which consists of
loans to GREs and capital injections to banks, as largely illiquid
and unlikely to be available for debt-servicing if needed. The
UFRD's assets totaled $16.8 billion as of March 31, 2024, with the
liquid portion at $6.2 billion.
High current account deficits and increasing external debt could
ultimately raise balance of payment risks for Uzbekistan, in S&P's
view. The surge in imports in 2023 was largely due to capital
goods, machinery, and transport equipment. Some of those reflect a
one-off increase such as aircrafts for new domestic airline
companies and cars, including electric vehicles, due to temporary
import tax exemptions. However, import growth is likely to stay
strong because of a large pipeline of investment projects. In
addition, Uzbekistan became a net importer of gas in October 2023
after it started importing Russian gas via a pipeline through
Kazakhstan. Along with increasing household consumption, large
projects like the Gas to Liquids Plant, Shurtan Gas Chemical
Complex, and Gas Chemical Complex MTO (methanol to olefin) will add
to gas consumption and imports over our forecast period.
Mirroring sizable current account deficits, the country's gross
external debt has risen in recent years across the government,
corporate, and financial sectors. S&P said, "Our external forecasts
are based on the expectation of moderating foreign debt
accumulation over the forecast horizon. However, FDI inflows remain
relatively low and concentrated in the extractive industries. We
expect FDI inflows will increase only gradually despite the
ambitious pipeline of privatization, partially due to lower
investment from Russian companies. Therefore, a significant portion
of current account deficit financing will likely still be through
debt."
Uzbekistan's exports continue to rely on commodities, which
constituted almost 50% of goods exports in 2023, particularly gold
(42% of goods exports). Favorable gold prices will boost exports in
2024, but we expect these to decline over our forecast period to
$2,000 per ounce (/oz) in 2025 and $1,700/oz in 2026, from
$2,100/oz for the rest of 2024. Conversely, increasing copper
production and prices could offset part of the decline.
S&P said, "We estimate that Uzbekistan's usable foreign exchange
reserves will decline through 2027 due to an expected fall in gold
prices and ongoing current account deficits. The Central Bank of
Uzbekistan's (CBU's) holdings of monetary gold constitutes more
than 80% of total usable reserves. The CBU has priority rights to
purchase gold mined in Uzbekistan. It purchases the gold with local
currency, then sells U.S. dollars in the local market to offset the
effect of its intervention on the Uzbek sum. We exclude UFRD's
assets from the CBU's reserves because we consider the former held
primarily for fiscal, rather than monetary or balance of payments,
needs. Our view is supported by the budgetary use of external UFRD
assets in the domestic economy over the past four years."
Uzbekistan's monetary policy effectiveness has improved in recent
years. One of the most significant reforms in that regard was the
liberalization of the exchange rate in September 2017 to a managed
float from a crawling peg. The CBU intervenes in the foreign
exchange market intermittently to smooth volatility and mitigate
the increase in local currency via its large gold purchases.
S&P said, "We forecast inflation will reach 11.0% this year, up
from a 9.1% average in 2023, given tariff hikes. We expect
inflation to fall gradually to 6.5% by 2027. In 2020, the CBU
adopted measures to transition to an inflation-targeting mechanism,
with a target of 5%.
"In our view, the large footprint of state-owned banks in the
sector, at 67% of total assets, and preferential government lending
programs reduce the effectiveness of the monetary transmission
mechanism. Following the privatization of Ipoteka bank in 2023,
authorities plan to privatize Asaka and SQB banks. However, we
consider this a challenging task that will likely take time. Also,
directed lending at preferential rates has diminished gradually, in
line with the growth of commercial lending, particularly retail
loans." To address very strong growth in consumer loans over the
past few years, especially for cars, from 2023 the central bank
implemented more stringent lending requirements, including limits
for car loan portfolio for banks and tighter debt service-to-income
limits for retail borrowers.
Dollarization, although declining, remains high at about 43% of
loans and 30% of deposits as of March 31, 2024.
S&P said, "In our view, Uzbekistan's banking sector will continue
to show resilience. We consider that favorable economic growth
prospects, strengthening disposable income, and low penetration of
retail lending in Uzbekistan (with household debt below 10% of GDP)
will remain among the key factors contributing to strong lending
demand in the next few years. The funding profiles of Uzbek banks
are largely stable, supported by sizable funding from the state and
international financial institutions and growth in corporate and
retail deposits. At the same time, access to long-term funding
remains scarce in the domestic market. We continue to see bank
regulation in Uzbekistan as reactive rather than proactive, with
regulatory actions not always predictable and transparent. However,
regulation is gradually improving.
"In accordance with our relevant policies and procedures, the
Rating Committee was composed of analysts that are qualified to
vote in the committee, with sufficient experience to convey the
appropriate level of knowledge and understanding of the methodology
applicable." At the onset of the committee, the chair confirmed
that the information provided to the Rating Committee by the
primary analyst had been distributed in a timely manner and was
sufficient for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and
critical issues in accordance with the relevant criteria.
Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected
in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to
articulate his/her opinion. The chair or designee reviewed the
draft report to ensure consistency with the Committee decision. The
views and the decision of the rating committee are summarized in
the above rationale and outlook. The weighting of all rating
factors is described in the methodology used in this rating
action.
Ratings List
RATINGS AFFIRMED
UZBEKISTAN
Sovereign Credit Rating BB-/Stable/B
Transfer & Convertibility Assessment BB-
Senior Unsecured BB-
=========
S P A I N
=========
UVESCO FOOD: Moody's Affirms 'B2' CFR, Outlook Remains Stable
-------------------------------------------------------------
Moody's Ratings has affirmed Uvesco Food Retail, S.L.'s B2
long-term corporate family rating and its B2-PD probability of
default rating. Moody's has also affirmed the B2 instrument ratings
on the EUR315 million senior secured term loan B (original term
loan B) as well as the EUR50 million senior secured revolving
credit facility (RCF) issued by FOOD RETAIL SOLUTIONS, S.L.U., a
100% owned subsidiary of Uvesco. Concurrently, Moody's has assigned
a B2 instrument rating to the new EUR50 million senior secured term
loan B1 (incremental facility) issued by FOOD RETAIL SOLUTIONS,
S.L.U. to partially fund the acquisition of 31 stores in Madrid.
The outlook for both entities remains stable.
The rating action reflects:
-- Uvesco's 9.1% sales growth and 5.1% like-for-like sales growth
in 2023 compared to 2022, driven by ongoing store openings, and
positive like-for-like growth supported by inflation and strong
consumer appetite for fresh grocery products.
-- The resulting 9.0% Moody's-adjusted EBITDA growth and
improvement in key credit metrics with Moody's-adjusted (gross)
leverage reducing to 4.4x (compared to 4.7x in 2022). The interest
coverage ratio, calculated as (Moody's-adjusted EBITDA - Capex) /
Interest expense, remained stable at 1.4x, as EBITDA growth was
offset by higher interest expense than in 2022.
-- Moody's expectation that the incremental debt facility, used
to acquire 31 stores in the Madrid region, will not materially
alter Uvesco's deleveraging path. Pro-forma for the transaction and
excluding synergies, the facility will add 0.4x of leverage and
including synergies, Moody's expects leverage to return to below
4.5x in the next 12 to 18 months.
RATINGS RATIONALE
The B2 CFR continues to reflect Uvesco's earnings growth on the
back of robust like-for-like sale growth rates and store openings;
its positive free cash flow generation; its high profitability,
with a Moody's-adjusted EBITDA margin of around 11% in 2023; and
its focus on locally sourced, high quality fresh products, which
differentiates the company from larger competitors.
At the same time, the company's rating is constrained by its high
leverage, with a Moody's-adjusted (gross) debt/EBITDA of around
4.4x in 2023; its small size relative to traditional grocers, which
could limit its pricing power; the concentration of its earnings in
certain regions in the north of Spain; and a low cash balance of
only EUR7 million as of December 2023.
LIQUIDTY
Uvesco's liquidity is adequate, with a EUR50 million undrawn senior
secured revolving credit facility (RCF), and despite a low cash
balance of EUR7 million as of December 2023. Moody's expects this,
together with positive free cash flow (FCF) generation to cover the
company's intra year working capital needs. Seasonal swings in
revenue and working capital could lead to temporary drawings on the
RCF.
Moody's expects Uvesco to generate positive FCF of around EUR20
million per year in the next 12-18 months. Moody's forecasts the
company's capital spending, excluding lease repayments, to be
around 3% of revenue and working capital movements to be neutral or
slightly positive on a yearly basis.
The senior secured RCF is subject to a springing net leverage
covenant. Moody's expects the company to maintain ample capacity
under this covenant in the next 12-18 months. The company does not
have any short-term maturities, and the first maturity is in 2029,
when the original term loan B together with the incremental
facility comes due.
OUTLOOK
The stable outlook reflects Moody's expectation that Uvesco will
continue to grow revenue and EBITDA, such that Moody's-adjusted
(gross) debt/EBITDA will trend below 4.5x in the next 12-18 months
and interest cover will hover around 1.5x, while the company will
generate positive free cash flows.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure could emerge if Moody's-adjusted (gross)
debt/EBITDA remains below 4.5x on a sustained basis,
Moody's-adjusted (EBITDA- Capex)/interest remains above 2.0x on a
sustained basis, Moody's-adjusted FCF/debt improves to around 5%,
and the company maintains a prudent financial policy, with no
dividends and debt-funded acquisitions.
Downward rating pressure could emerge if Moody's-adjusted (gross)
debt/EBITDA rises towards 5.5x, for instance because of a downturn
in the fresh food market or the company's inability to sustain its
growth pace despite capital spending, Moody's-adjusted interest
cover remains below 1.25x on a sustained basis, or the company's
liquidity deteriorates.
STRUCTRUAL CONSIDERATIONS
Moody's rates the EUR315 million senior secured term loan B
(original term loan B), the new EUR50 million senior secured term
loan B1 (incremental facility) and the EUR50 million senior secured
RCF borrowed by FOOD RETAIL SOLUTIONS, S.L.U. at B2, in line with
the CFR, reflecting their pari passu ranking. The B2 ratings also
reflects the presence of upstream guarantees from material
subsidiaries of the group.
The B2-PD probability of default rating, in line with the CFR,
reflects the hypothetical recovery rate of 50%, which is
appropriate for a capital structure comprising bank debt and with a
single springing covenant under the senior secured RCF with
significant capacity.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Retail and
Apparel published in November 2023.
COMPANY PROFILE
Headquartered in Guipúzcoa (Basque Country) and founded in 1993
Uvesco is a regional grocer with a strong presence in the Basque
Country, Cantabria, Navarra and La Rioja, and a growing position in
Madrid. Uvesco has been owned since 2022 by private equity firm PAI
Partners. In 2023, Uvesco reported sales and EBITDA of EUR1,050
million and 76.7 million, respectively.
===========================
U N I T E D K I N G D O M
===========================
DAMEN SHIPYARDS: Damen Files Bankruptcy Request
-----------------------------------------------
Bogdan Todasca at SeeNews reports that Dutch shipbuilding group
Damen has filed a bankruptcy request against Damen Shipyards
Mangalia, its joint venture with the Romanian government in which
Damen holds a 49% stake, court documents show.
The request was filed with the Constanta Tribunal on May 28, with
the first hearing scheduled to commence on June 14, SeeNews relays,
citing court documents submitted to the Constanta Tribunal and
published on the justice ministry's online portal earlier this
week.
The creditor's claim concerns loans totalling EUR160 million
granted by Damen group to Mangalia shipyard since 2018, Radio Free
Europe Romania quoted Laurentiu Gobeaja, trade union leader at the
shipyard, as saying on May 29, SeeNews relates. Additionally,
approximately 70% of the shipyard's employees face technical
unemployment, according to Mr. Gobeaja, SeeNews notes.
In 2018, Damen acquired Daewoo Shipbuilding & Marine Engineering's
51% stake in the Mangalia shipyard and subsequently transferred 2%
to the Romanian government, allowing the Romanian state to become
majority shareholder in exchange for maintaining operational and
managerial control of the joint venture, SeeNews recounts.
INVERNESS CALEDONIAN: Chairman Steps Down Amid Club Challenges
--------------------------------------------------------------
Fraser Wilson at Daily Record reports that Inverness chairman Ross
Morrison has resigned -- paving the way for the relegated club to
scrap controversial plans to move their training base to Fife.
The Caley Thistle chief -- who announced his decision ahead of a
crunch board meeting -- insists he still believes the 135-mile move
to Kelty is the best way to stave off mounting costs of locating
players in the Highlands, Daily Record discloses. But the proposal
has caused fury among the club's supporters with calls for a
boycott of season tickets and some indicating they'd rather go into
administration than relocate their midweek first team operations,
Daily Record notes.
According to Daily Record, Mr. Morrison, who had been at the helm
for six years, told the Inverness Courier: "Hearing fans saying
they would prefer administration to training the first team in
Kelty sent a shiver down my spine. Administration is a desperate
thing to happen to a club and must, at all costs, not happen to
Inverness Caledonian Thistle FC."
He added that he still firmly believed the move to Fife was in the
best interests of the side which will begin life in League One --
with Kelty one of their rivals -- next season after their
relegation from the Championship. Mr. Morrison, as cited by Daily
Record, said: "I believe it is the best way forward and I have to
stick with my beliefs. This is the reason I'm stepping down now."
The relocation plan was first revealed late last month, Daily
Record recounts. The club argued it would save hundreds of
thousands of pounds by removing the cost of housing central
belt-based signings in the Highlands, Daily Record relates.
However there is now huge pressure on the board to scrap the move
which has also put the microscope on chief executive Scot Gardiner,
Daily Record states.
Mr. Morrison revealed last week the club could yet u-turn on the
deal, Daily Record relays. A boycott of season tickets would
potentially wipe out any savings from the relocation, according to
Daily Record.
MERLIN REPAIR: Goes Into Administration, 100 Workers Affected
-------------------------------------------------------------
Grant Prior at Construction Enquirer reports that a number of the
firm's 100 workers took to LinkedIn over the weekend after being
suddenly let go by the Manchester based contractor.
Merlin Repair Specialists has a nationwide team of technicians who
specialise in the repair and resurfacing of damaged manufactured
interior and exterior surfaces for some of the country's largest
construction companies.
According to Construction Enquirer, one former worker said: "It's
unfortunate what has happened to us all and now we are all in the
same boat looking for a new role after Merlin Repair Specialists
Ltd went under without any notice."
"I'm sorry to have to report that Merlin Repair Specialists has
gone into administration," Construction Enquirer quotes a Merlin
manager as saying.
OBAN PHOENIX: Put Into Provisional Liquidation
----------------------------------------------
Peter A. Walker at Insider.co.uk reports that an appeal to save
Oban Phoenix Cinema has been launched, after the venue was placed
into provisional liquidation.
Blair Milne and David Meldrum of accountancy firm Azets, who have
been appointed joint provisional liquidators, are asking interested
parties to contact them promptly to maximise the chances of finding
a buyer, Insider.co.uk relates.
According to Insider.co.uk, the provisional liquidation has been
caused by a marked decline in audience numbers and revenue stemming
from the pandemic, together with rising operating costs due to
inflationary pressures.
The cinema has ceased trading with immediate effect and all eight
staff have been made redundant, Insider.co.uk discloses.
Mr. Milne, as cited by Insider.co.uk, said: "Despite the extensive
efforts of the board of trustees, many volunteers and supporters,
the financial issues affecting Oban Phoenix Cinema caused
unsustainable cash flow problems and as such provisional
liquidation was the only option.
"We will market the property and assets for sale and try to find a
buyer keen to continue operating a cinema on the site -- we are
hopeful that our urgent call for a buyer will appeal to a variety
of interested parties including existing cinema operators, an
entrepreneur keen to enter the sector or a larger business willing
to invest in an important and valued community asset.
"We will also provide every possible support to the staff that have
been made redundant including assistance with the submission of
claims to the Redundancy Payments Office and accessing suitable
employment support services."
RINGSFIELD HALL: Liquidators Reject Kinda's Bid for Eco-Centre
--------------------------------------------------------------
Bruno Brown at Eastern Daily Press reports that liquidators have
rejected a bid to save an outdoor education centre which has been
running for more than 50 years.
According to Eastern Daily Press, they have turned down an
application by a forest school group to take on Ringsfield Hall,
near Beccles.
The trust which runs the centre declared insolvency in February
after it ran into financial difficulties, Eastern Daily Press
relates.
It was suggested that the hall be sold off to pay debts, which were
understood to be around GBP150,000, Eastern Daily Press notes.
It led to Kinda Education CIC, a non-profit specialising in
nature-based education and which already runs forest school groups
in Holton, Halesworth and Worlingham, expressing an interest in
taking it on, Eastern Daily Press Eastern Daily Press discloses.
But the liquidators have rejected the bid, Eastern Daily Press
states.
"Our team have not been given access to look around the hall itself
and have not been provided with details of the debts which need
paying off," Eastern Daily Press quotes Mell Harrison, CEO of Kinda
Education, as saying.
"The liquidators informed us the hall is not fit for purpose as an
education centre."
In a further bid to save it, local councillors are working on
designating the hall as an "asset of community value" which, if
successful, will put a brake on any efforts to sell the building
off, Eastern Daily Press relays.
The Ringsfield Hall eco-centre was founded by Beccles-based
Reverend Peter Langford.
SMIFFYS: Set to Go Into Administration
--------------------------------------
Business Sale reports that Smiffys, a fancy dress manufacturer and
distributor dating back to the 19th century, has filed a notice of
intention to appoint administrators (NOI) after reportedly failing
to find a buyer.
The company, which was founded in 1894 and is part of R.H. Smith &
Sons (Wigmakers) Limited, is said to have suffered as a result of
overstocking and inflationary challenges, Business Sale relates.
According to its website, the family-owned company ships in excess
of 26 million fancy dress items annually, distributing
approximately 7,500 products to thousands of stockists worldwide.
However, it has suffered in recent years as a result of COVID-19,
supply chain disruption and rising inflation, Business Sale
discloses. Over the past few weeks, the company has reportedly
sought to secure a solvent sale, but has now lined up PwC to act as
administrators having failed to find a buyer, Business Sale notes.
In a statement, the company, as cited by Business Sale, said:
"Following four extremely challenging years as a result of the
pandemic, the subsequent supply chain crisis, and the ongoing
inflationary burden on both businesses and consumers, Smiffys was
required to take the difficult decision yesterday to file a notice
of intention to appoint administrators."
The company emphasised that the NOI "does not mean" that it is in
administration, but enables it "to explore a number of potential
options, with the ultimate aim of securing a sustainable business
for the future." The statement added that the company "will
continue to trade and fulfil orders as normal during this time".
In R.H. Smith & Sons (Wigmakers) Limited's most recent accounts at
Companies House, for the year to March 31, 2023, it reported
turnover of GBP54.7 million, up from GBP39.6 million a year
earlier, but fell from an operating profit of GBP274,285 to a loss
of just over GBP3 million, Business Sale states.
At the time, the firm's fixed assets were valued at GBP1.48 million
and current assets at GBP30.2 million, but net assets amounted to
just GBP5.49 million, down from GBP9.2 million a year earlier,
according to Business Sale.
*********
S U B S C R I P T I O N I N F O R M A T I O N
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