/raid1/www/Hosts/bankrupt/TCREUR_Public/240801.mbx
T R O U B L E D C O M P A N Y R E P O R T E R
E U R O P E
Thursday, August 1, 2024, Vol. 25, No. 154
Headlines
F R A N C E
FOUNDEVER GROUP: EUR1BB Bank Debt Trades at 25% Discount
G E R M A N Y
PFLEIDERER GROUP: S&P Cuts ICR to 'CCC' on Distressed Transaction
PONY SA 2024-1: Fitch Assigns 'BBsf' Final Rating to Class F Notes
I R E L A N D
ARINI EUROPEAN III: S&P Assigns Prelim B- (sf) Rating to F Notes
JUBILEE 2019-XXII: Fitch Assigns B-(EXP)sf Rating to Cl. F-R Notes
PENTA CLO 11: Fitch Assigns 'B-sf' Final Rating to Class F-R Notes
I T A L Y
SIENA MORTGAGES 07-5: Moody's Ups Rating on EUR239MM C Notes to B1
L U X E M B O U R G
CPI PROPERTY: Moody's Assigns Ba1 CFR, Cuts Sr. Unsec. Notes to Ba1
N E T H E R L A N D S
JUBILEE PLACE 4: S&P Raises Cl. E-Dfrd Notes Rating to 'BB+ (sf)'
R U S S I A
XALQ BANK: S&P Affirms 'B' ICRs, Alters Outlook to Positive
S P A I N
AYT COLATERALES I: Moody's Hikes Rating on EUR3.8MM D Notes to B1
HYPESOL SOLAR: S&P Cuts SPUR to 'BB-', On CreditWatch Negative
T U R K E Y
ARAP TURK: Fitch Affirms 'B-' LongTerm IDR, Outlook Positive
[*] Moody's Takes Rating Actions on 8 Turkish Corporates
U K R A I N E
UKRAINE: Fitch Lowers LongTerm Foreign Currency IDR to 'C'
U N I T E D K I N G D O M
IVC EVIDENSIA: S&P Alters Outlook to Stable, Affirms 'B' ICR
PAVILLION 2022-1: Fitch Alters Outlook on 'Bsf' Rating to Positive
PREFERRED RESIDENTIAL: Fitch Affirms 'B-sf' Rating on Cl. E1c Notes
VEDANTA RESOURCES: S&P Upgrades LT ICR to 'B-', Outlook Stable
- - - - -
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F R A N C E
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FOUNDEVER GROUP: EUR1BB Bank Debt Trades at 25% Discount
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Participations in a syndicated loan under which Foundever Group SA
is a borrower were trading in the secondary market around 74.7
cents-on-the-dollar during the week ended Friday, July 26, 2024,
according to Bloomberg's Evaluated Pricing service data.
The EUR1 billion Term loan facility is scheduled to mature on
August 28, 2028. The amount is fully drawn and outstanding.
Foundever Group S.A., domiciled in Luxembourg, is a leading global
provider of CX products and solutions. Foundever generated $3.7
billion revenue for the twelve months ended March 31, 2024. The
company is owned by the Creadev Investment Fund (Creadev), which is
controlled by the Mulliez family of France.
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G E R M A N Y
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PFLEIDERER GROUP: S&P Cuts ICR to 'CCC' on Distressed Transaction
-----------------------------------------------------------------
S&P Global Ratings downgraded Germany-based wood panel manufacturer
Pfleiderer Group B.V. & Co. KG (Pfleiderer) to 'CCC' from 'B'. S&P
is also lowering its issue ratings on the senior secured debt to
'CCC' from 'B'.
S&P said, "We placed the ratings on CreditWatch with negative
implications, which indicates that there is a one-in-two likelihood
that we could lower the ratings in the next three months if the
company and its creditors agreed to a restructuring which we
consider distressed."
Soft market conditions will undermine Pfleiderer's FOCF generation
in 2024; recovery prospects for 2025 remain modest. Pfleiderer's
end-markets are cyclical due to the discretionary nature of home
renovation spending, and the inherent cyclicality of the
construction industry. S&P said, "We anticipate weak economic
conditions to lead to a 4%-5% reduction in Pfleiderer's sales in
2024. The lower fixed-cost absorption will lead to a 10% decline in
S&P Global Ratings-adjusted EBITDA. We forecast S&P Global
Ratings-adjusted leverage to increase to 10.5x-11.0x (9.6x in
2023)." Any improvement in EBITDA in 2025 is highly reliant on a
rebound in consumer confidence.
Distressed debt restructuring is likely. S&P said, "We expect
Pfleiderer to generate negative FOCF of EUR20 million in 2024
(positive EUR2 million in 2023), and we do not expect a meaningful
FOCF improvement in 2025. We consider this level of FOCF generation
as weak and insufficient for the current debt burden, and therefore
view its capital structure as unsustainable. Given the recent
proposal submitted to creditors, we think that a distressed
transaction is likely in the next 12 months."
S&P said, "We view liquidity as less than adequate.We think the
company will not be able to withstand low-probability high-impact
events without a refinancing need. That said, a fully available
EUR65 million revolving credit facility (RCF), a cash balance of
EUR23 million, and no debt maturities in the coming 12 months
support our assessment.
"We view Strategic Value Partners' financial policy as very
aggressive.In our view, Pfleiderer's dividend payments in 2021
(EUR341 million) and 2023 (EUR28.1 million) reflect a very
aggressive financial policy by its sponsor Strategic Value
Partners.
"The CreditWatch negative placement indicates that there is a
one-in-two likelihood that we could lower the ratings in the next
three months if the company and its creditors agreed to a
restructuring which we consider distressed. We will resolve the
CreditWatch placement once the company agrees on amended debt terms
with its creditors."
PONY SA 2024-1: Fitch Assigns 'BBsf' Final Rating to Class F Notes
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Fitch Ratings has assigned Pony S.A. Compartment German Auto Loans
2024-1 (Pony 2024) final ratings, as detailed below.
Entity/Debt Rating Prior
----------- ------ -----
Pony S.A., Compartment
German Auto Loans 2024-1
A XS2845208664 LT AAAsf New Rating AAA(EXP)sf
B XS2845211023 LT AA+sf New Rating AA+(EXP)sf
C XS2845211296 LT AA-sf New Rating AA-(EXP)sf
D XS2845211379 LT A-sf New Rating A-(EXP)sf
E XS2845211536 LT BB+sf New Rating BB+(EXP)sf
F XS2845211882 LT BBsf New Rating BB(EXP)sf
G XS2845211965 LT NRsf New Rating NR(EXP)sf
Transaction Summary
In Pony 2024, Hyundai Capital Bank Europe GmbH (not rated; HCBE)
has securitised a portfolio of auto loans with a six-month
revolving period. After the revolving period, initially only the
class A notes will amortise until they reach an
overcollateralisation (OC) threshold. The class A to F notes will
then pay down pro rata until a performance or other trigger is
breached, while the class G notes' repayment follows a defined
schedule.
This is the third transaction from the Pony shelf that Fitch has
rated from this originator.
KEY RATING DRIVERS
Low Originator Book Defaults: The low historical defaults of HCBE's
loans, better-than-expected performance of the 2021 predecessor
deal, and its stable asset outlook for auto ABS are reflected in
the base-case default rate of 1.3%, which is lower than the 1.5%
base case Fitch assumed for HCBE's previous issuance. Unlike in
Pony 2023, Fitch has not incorporated any shifts in pool
composition during the short revolving phase, and it applies a
'AAA' default multiple of 6.75x, unchanged from the predecessor
transaction.
Pro Rata Principal Allocations: The repayment dynamics of the notes
depend on the length of pro rata allocation of principal, which
begins once OC for the class A notes increases to at least 11%. The
loss-based trigger is tighter than in Pony 2023. Nevertheless, in
its driving 'AAA' scenario, principal is allocated pro rata for 11
months. In its 'BB' scenario, allocations are pro rata for more
than half of the transaction's lifetime, and only the trigger
related to the outstanding asset balance ultimately forces the
structure into sequential payment.
Reserve Funding Through Unrated HCBE: Rating triggers for the
funding of a commingling, set-off and replacement servicer fee
reserve by HCBE refer to the rating of Santander Consumer Bank AG
(SCB; A-/Stable), which has a 51% stake in HCBE. Fitch considers
the reference to SCB's rating adequate for this purpose, based on
its assessment of the bank's investment objectives and HCBE's
relevance in SCB's long-term strategic targets.
Counterparty Risks Addressed: The transaction will feature a
liquidity reserve to reduce payment interruption risk. It will be
funded at closing and provide about three months of coverage of the
issuer's expenses. Considerations for a replacement of the
servicer, and remedial actions for the transaction account bank and
swap counterparty are adequately defined and in line with its
counterparty criteria.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
Sensitivities to higher default rates and lower recoveries are
shown below:
Defaults increase by 10%
Class A. 'AAAsf'; Class B: 'AA+sf'; Class C: 'AA-sf'; Class D:
'A-sf'; Class E: 'BB+sf'; Class F: 'BBsf'
Defaults increase by 25%
Class A: 'AAAsf'; Class B: 'AAsf'; Class C: 'A+sf'; Class D:
'BBB+sf'; Class E: 'BB+sf'; Class F: 'BBsf'
Defaults increase by 50%
Class A: 'AA+sf'; Class B: 'AA-sf'; Class C: 'Asf'; Class D:
'BBBsf'; Class E: 'BBsf'; Class F: 'BB-sf'
Recoveries decrease by 10%
Class A: 'AAAsf'; Class B: 'AA+sf'; Class C: 'AA-sf'; Class D:
'A-sf'; Class E: 'BB+sf'; Class F: 'BB+sf'
Recoveries decrease by 25%
Class A: 'AAAsf'; Class B: 'AA+sf'; Class C: 'A+sf'; Class D:
'A-sf'; Class E: 'BB+sf'; Class F: 'BBsf'
Recoveries decrease by 50%
Class A: 'AAAsf'; Class B: 'AAsf'; Class C: 'A+sf'; Class D:
'BBB+sf'; Class E: 'BBsf'; Class F: 'BB-sf'
Defaults increase by 10% and recoveries decrease by 10%
Class A: 'AAAsf'; Class B: 'AA+sf'; Class C: 'A+sf'; Class D:
'A-sf'; Class E: 'BB+sf'; Class F: 'BBsf'
Defaults increase by 25% and recoveries decrease by 25%
Class A: 'AA+sf'; Class B: 'AAsf'; Class C: 'Asf'; Class D:
'BBBsf'; Class E: 'BBsf'; Class F: 'B+sf'
Defaults increase by 50% and recoveries decrease by 50%
Class A: 'AA-sf'; Class B: 'Asf'; Class C: 'BBBsf'; Class D:
'BB+sf'; Class E: 'Bsf'; Class F: 'B-sf'
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Sensitivities to lower default rates and higher recoveries are
shown below:
Defaults decrease by 25% and recoveries increase by 25%
Class A: 'AAAsf'; Class B: 'AAAsf'; Class C: 'AA+sf; Class D:
'AAsf'; Class E: 'Asf'; Class F: 'A-sf'
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 reviewed the results of a third party assessment conducted on
the asset portfolio information, and concluded that there were no
findings that affected the rating analysis.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
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I R E L A N D
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ARINI EUROPEAN III: S&P Assigns Prelim B- (sf) Rating to F Notes
----------------------------------------------------------------
S&P Global Ratings assigned its preliminary credit ratings to Arini
European CLO III DAC's class A, B, C, D, E, and F notes. At
closing, the issuer will also issue unrated subordinated notes.
This is a European cash flow CLO transaction, securitizing a pool
of primarily syndicated senior secured loans or bonds. The
portfolio's reinvestment period will end approximately 5.17 years
after closing. Under the transaction documents, the rated notes pay
quarterly interest unless there is a frequency switch event.
Following this, the notes will switch to semiannual payment.
S&P said, "We consider that the portfolio on the effective date
will be well-diversified, primarily comprising broadly syndicated
speculative-grade senior secured term loans and senior secured
bonds. Therefore, we have conducted our credit and cash flow
analysis by applying our criteria for corporate cash flow CDOs."
Portfolio benchmarks
CURRENT
S&P Global Ratings' weighted-average rating factor 2,776.02
Default rate dispersion 527.13
Weighted-average life (years)
excluding reinvestment period 4.94
Weighted-average life (years)
including reinvestment period 5.17
Obligor diversity measure 113.79
Industry diversity measure 21.33
Regional diversity measure 1.31
Transaction key metrics
CURRENT
Total par amount (mil. EUR) 400
Defaulted assets (mil. EUR) 0
Number of performing obligors 131
Portfolio weighted-average rating
derived from S&P's CDO evaluator B
'CCC' category rated assets (%) 1.50
Target 'AAA' weighted-average recovery (%) 37.80
Target weighted-average spread net of floors (%) 4.03
Target weighted-average coupon (%) 5.88
S&P said, "In our cash flow analysis, we modeled the EUR400 million
target par amount, the target weighted-average spread of 4.03%, the
target weighted-average coupon of 5.88% and the target
weighted-average recovery rates for all rated notes. 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.
"Following the application of our structured finance sovereign risk
criteria, we consider the transaction's exposure to country risk is
sufficiently limited at the assigned preliminary ratings, as the
exposure to individual sovereigns does not exceed the
diversification thresholds outlined in our criteria.
"At closing, we expect that the transaction's documented
counterparty replacement and remedy mechanisms will adequately
mitigate its exposure to counterparty risk under our current
counterparty criteria.
"We expect the transaction's legal structure to be bankruptcy
remote, in line with our legal criteria.
"Following our analysis of the credit, cash flow, counterparty,
operational, and legal risks, we believe that our preliminary
ratings are commensurate with the available credit enhancement for
the class A to F notes.
"Our credit and cash flow analysis indicates that the available
credit enhancement for the class B to F notes is commensurate with
higher preliminary ratings than those we have assigned. However, as
the CLO will have a reinvestment period, during which the
transaction's credit risk profile could deteriorate, we have capped
our preliminary ratings on these notes.
"In addition to our standard analysis, we have also included the
sensitivity of the ratings on the class A to E notes based on four
hypothetical scenarios.
"As our ratings analysis makes additional considerations before
assigning ratings in the 'CCC' category, and we would assign a 'B-'
rating if the criteria for assigning a 'CCC' category rating are
not met, we have not included the above scenario analysis results
for the class F notes."
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; non-sustainable palm oil; coal, thermal coal
or oil sands; speculative commodities; tobacco; hazardous
chemicals; pornography or prostitution; civilian firearms; payday
lending; private prisons and illegal drugs or narcotics.
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, no specific adjustments have been
made in our rating analysis to account for any ESG-related risks or
opportunities."
Arini European CLO III DAC is a European cash flow CLO
securitization of a revolving pool, comprising euro-denominated
senior secured loans and bonds issued mainly by speculative-grade
borrowers. Squarepoint Capital will act as collateral manager until
Arini Capital Management Ltd. receives the necessary regulatory
permissions, following which Arini will replace Squarepoint as
collateral manager.
Preliminary ratings
PRELIM. PRELIM. AMOUNT
CLASS RATING* (MIL. EUR) SUB (%) INTEREST RATE§
A AAA (sf) 248.00 38.00 Three/six-month EURIBOR
plus 1.36%
B AA (sf) 45.20 26.70 Three/six-month EURIBOR
plus 1.98%
C A (sf) 23.00 20.95 Three/six-month EURIBOR
plus 2.45%
D BBB- (sf) 27.80 14.00 Three/six-month EURIBOR
plus 3.55%
E BB- (sf) 18.00 9.50 Three/six-month EURIBOR
plus 6.10%
F B- (sf) 12.00 6.50 Three/six-month EURIBOR
plus 8.28%
Sub NR 31.40 N/A N/A
*The preliminary ratings assigned to the class A and B notes
address timely interest and ultimate principal payments. The
preliminary ratings assigned to the class C to F notes address
ultimate interest and principal payments.
§The payment frequency switches to semiannual and the index
switches to six-month EURIBOR when a frequency switch event occurs.
EURIBOR--Euro Interbank Offered Rate.
NR--Not rated.
N/A--Not applicable.
JUBILEE 2019-XXII: Fitch Assigns B-(EXP)sf Rating to Cl. F-R Notes
------------------------------------------------------------------
Fitch Ratings has assigned Jubilee CLO 2019-XXII DAC reset notes
expected ratings.
The assignment of final ratings is contingent on the receipt of
final documents conforming to information already reviewed.
Entity/Debt Rating
----------- ------
Jubilee CLO
2019-XXII DAC
A-1-R LT AAA(EXP)sf Expected Rating
A-2-R LT AAA(EXP)sf Expected Rating
B-1-R LT AA(EXP)sf Expected Rating
B-2-R LT AA(EXP)sf Expected Rating
C-R LT A(EXP)sf Expected Rating
D-R LT BBB-(EXP)sf Expected Rating
E-R LT BB-(EXP)sf Expected Rating
F-R LT B-(EXP)sf Expected Rating
Sub LT NR(EXP)sf Expected Rating
Transaction Summary
Jubilee CLO 2019-XXII DAC is a securitisation of mainly senior
secured obligations (at least 96%) with a component of senior
unsecured, mezzanine, second-lien loans and high-yield bonds. Note
proceeds will be used to fund a portfolio with a target par of
EUR500 million and redeem its outstanding notes. The portfolio is
actively managed by Alcentra Ltd. The CLO has about a 4.5-year
reinvestment period and a seven-year weighted average life (WAL)
test limit.
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch places the
average credit quality of obligors in the identified portfolio at
'B'/'B-'. The Fitch weighted average rating factor of the
identified portfolio is 24.6.
High Recovery Expectations (Positive): At least 96% of the
portfolio is expected to 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 of the identified portfolio is
62.2%.
Diversified Asset Portfolio (Positive): The transaction will
include various concentration limits in the portfolio, including a
fixed-rate obligation limit at 12.5%, a top 10 obligor
concentration limit at 20%, and a maximum exposure to the three
largest Fitch-defined industries in the portfolio at 40%. These
covenants ensure that the asset portfolio will not be exposed to
excessive concentration.
Portfolio Management (Neutral): The transaction will have an
approximately 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.
WAL Step-Up Feature (Neutral): The transaction can extend the WAL
by one year, to seven years, on the step-up date, which is one year
after closing. The WAL extension will be subject to conditions
including satisfying the collateral quality tests and the adjusted
collateral balance being at least equal to the reinvestment target
par.
Cash Flow Modelling (Neutral): The WAL used for the Fitch-stressed
portfolio was 12 months less than the WAL covenant to account for
structural and reinvestment conditions after the reinvestment
period, including passing the over-collateralisation and Fitch
'CCC' limitation tests, and a WAL covenant that progressively steps
down over time, both before and after the end of the reinvestment
period. In Fitch's opinion, these conditions 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 to below 'B-sf'
for the class F-R notes, but would have no impact on the other
notes.
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-R, C-R, D-R and E-R notes
have a rating cushion of two notches and the class F-R notes three
notches. The class A-1-R notes and class A-2-R notes do not display
any rating cushion as they are already at the highest achievable
rating.
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 downgrades of three
notches for the class A-1-R, A-2-R and E-R notes, four notches for
the class B-1-R to C-R notes and two notches for the class D-R
notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction of the RDR across all ratings and a 25% increase in
the RRR across all ratings of the Fitch-stressed portfolio would
lead to upgrades of up to three notches for the notes, except for
the 'AAAsf' rated notes, which are already at the highest level on
Fitch's scale and cannot be upgraded.
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
Recognized Statistical Rating Organizations 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 Jubilee CLO
2019-XXII 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.
PENTA CLO 11: Fitch Assigns 'B-sf' Final Rating to Class F-R Notes
------------------------------------------------------------------
Fitch Ratings has assigned Penta CLO 11 DAC's reset notes final
ratings, as detailed below.
Entity/Debt Rating Prior
----------- ------ -----
Penta CLO 11 DAC
A XS2462576633 LT PIFsf Paid In Full AAAsf
A-R XS2858657435 LT AAAsf New Rating
B XS2462576716 LT PIFsf Paid In Full AAsf
B-R XS2858657609 LT AAsf New Rating
C XS2462576807 LT PIFsf Paid In Full Asf
C-R XS2858658086 LT Asf New Rating
D XS2462576989 LT PIFsf Paid In Full BBB-sf
D-R XS2858658243 LT BBB-sf New Rating
E XS2462577011 LT PIFsf Paid In Full BB-sf
E-R XS2858658599 LT BB-sf New Rating
F XS2462577102 LT PIFsf Paid In Full B-sf
F-R XS2858658755 LT B-sf New Rating
X-R XS2858657278 LT AAAsf New Rating
Transaction Summary
Penta CLO 11 DAC is a securitisation of mainly senior secured
obligations (at least 90%) with a component of senior unsecured,
mezzanine, second-lien loans and high-yield bonds. Note proceeds
have been used to fund a portfolio with a target par of EUR400
million and to redeem the outstanding notes excluding the
subordinated notes. The portfolio is actively managed by Partners
Group (UK) Management Ltd. The collateralised loan obligation (CLO)
has a 4.5-year reinvestment period and a 7.5 year weighted average
life (WAL) test limit.
KEY RATING DRIVERS
Average Portfolio Credit Quality (Neutral): Fitch places the
average credit quality of obligors in the current portfolio at
'B'/'B-'. The Fitch weighted average rating factor (WARF) of the
current portfolio is 25.8.
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 (WARR) of the current portfolio is 62.6%.
Diversified Asset Portfolio (Positive): The transaction includes
various concentration limits in the portfolio, including a
fixed-rate obligation limit at 7.5% and a top 10 obligor
concentration limit at 20%. The transaction also includes various
concentration limits, including the maximum exposure to the
three-largest Fitch-defined industries in the portfolio at 40%.
These covenants ensure that the asset portfolio will not be exposed
to excessive concentration.
Portfolio Management (Neutral): The transaction has a 4.5-year
reinvestment period and includes 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.
WAL Step-Up Feature (Neutral): The transaction can extend the WAL
by one year, to 7.5 years, on the step-up date or onwards, which
can be one year after closing at the earliest. The WAL extension
will be automatic subject to conditions including satisfying the
collateral-quality tests, coverage tests and the Fitch-adjusted
collateral principal amount being at least equal to the
reinvestment target par.
Cash Flow Modelling (Neutral): The WAL used for the Fitch-stressed
portfolio was 12 months less than the WAL covenant to account for
structural and reinvestment conditions after the reinvestment
period, including passing the over-collateralisation and Fitch
'CCC' limitation tests, and a WAL covenant that progressively steps
down over time, both before and after the end of the reinvestment
period. In Fitch's opinion, these conditions 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 current portfolio would have no impact on the class X-R notes
and class A-R notes, would lead to downgrades of two notches for
the class B-R notes, of no more than one notch for the class C-R,
D-R and E-R notes, and to below 'B-sf' for the class F-R notes.
Downgrades, which are based on the current portfolio, 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 current portfolio
than the Fitch-stressed portfolio, the class B-R to D-R notes have
a rating cushion of two notches, the class F-R notes have four
notches, while the class X-R notes and class A-R notes do not have
any rating cushion as they are already at the highest achievable
rating.
Should the cushion between the current 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 downgrades of three
notches for the class C-R and E-R notes, of four notches for the
class A-R and B-R notes, of two notches for the class D-R notes and
to below 'B-sf' for the class F-R notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
A 25% reduction of the RDR across all ratings and a 25% increase in
the RRR across all ratings of the Fitch-stressed portfolio would
lead to upgrades of up to five notches for the rated notes, except
for the 'AAAsf' rated 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, except for the
'AAAsf' notes, 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 Penta CLO 11 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.
=========
I T A L Y
=========
SIENA MORTGAGES 07-5: Moody's Ups Rating on EUR239MM C Notes to B1
------------------------------------------------------------------
Moody's Ratings has upgraded the rating of Class C notes in Siena
Mortgages 07-5 S.p.A. The rating action reflects the increased
levels of credit enhancement for the affected notes.
EUR4765.9M Class A Notes, Affirmed Aa3 (sf); previously on Mar 30,
2021 Confirmed at Aa3 (sf)
EUR157.45M Class B Notes, Affirmed Aa3 (sf); previously on Mar 30,
2021 Confirmed at Aa3 (sf)
EUR239M Class C Notes, Upgraded to B1 (sf); previously on Mar 30,
2021 Affirmed B3 (sf)
Moody's affirmed the ratings of the notes that had sufficient
credit enhancement to maintain their current ratings.
Maximum achievable rating is Aa3 (sf) for structured finance
transactions in Italy, driven by the corresponding local currency
country ceiling of the country.
RATINGS RATIONALE
The rating action is prompted by an increase in credit enhancement
for the affected tranches.
Increase in Available Credit Enhancement
Sequential amortization and a non-amortizing reserve fund led to
the increase in the credit enhancement available in this
transaction.
For instance, as of June 2024 payment date, the credit enhancement
for Class C notes affected by the rating action increased to 7.63%
from 2.90% since the last rating action.
Moody's also factored into Moody's analysis the fact that the net
swap proceeds are not sufficient to fully cover the interest costs
of the rated notes, which leads to negative carry in the
transaction.
Key Collateral Assumptions
As part of the rating action, Moody's reassessed Moody's lifetime
loss expectation for the portfolio reflecting the collateral
performance to date.
The performance of the transaction has continued to be stable since
March 2021. Total delinquencies have decreased in the past year,
with 90 days plus arrears currently standing at 0.67% of current
pool balance. Cumulative defaults currently stand at 2.54% of
original pool balance up from 2.51% a year earlier.
Moody's decreased the expected loss assumption to 2.2% as a
percentage of current pool balance from 2.39% due to stable
performance. The revised expected loss assumption corresponds to
1.21% as a percentage of original pool balance.
Moody's have also assessed loan-by-loan information as part of
Moody's detailed transaction review to determine the credit support
consistent with target rating levels and the volatility of future
losses. As a result, Moody's have maintained the MILAN Stressed
Loss assumption at 8.1%.
The principal methodology used in these ratings was "Moody's
Approach to Rating RMBS Using the MILAN Framework" published in May
2024.
The analysis undertaken by us at the initial assignment of a rating
for RMBS securities may focus on aspects that become less relevant
or typically remain unchanged during the surveillance stage. Please
see Moody's Approach to Rating RMBS Using the MILAN Framework
methodology for further information on Moody's analysis at the
initial rating assignment and the on-going surveillance in RMBS.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include (1) performance of the underlying collateral that
is better than Moody's expected, (2) an increase in available
credit enhancement and (3) improvements in the credit quality of
the transaction counterparties and (4) a decrease in sovereign
risk.
Factors or circumstances that could lead to a downgrade of the
ratings include (1) an increase in sovereign risk, (2) performance
of the underlying collateral that is worse than Moody's expected,
(3) deterioration in the notes' available credit enhancement and
(4) deterioration in the credit quality of the transaction
counterparties.
===================
L U X E M B O U R G
===================
CPI PROPERTY: Moody's Assigns Ba1 CFR, Cuts Sr. Unsec. Notes to Ba1
-------------------------------------------------------------------
Moody's Ratings has assigned a long-term corporate family rating of
Ba1 for CPI Property Group (CPI) and has withdrawn its Baa3
long-term issuer rating. Concurrently, CPI's senior unsecured
ratings were downgraded to Ba1 from Baa3, the senior unsecured MTN
rating to (P)Ba1 from (P)Baa3, the junior subordinated debt rating
to Ba3 from Ba2 and its junior subordinated MTN rating to (P)Ba3
from (P)Ba2. Moody's have also downgraded CPI Hungary Investments
Kft.'s backed senior unsecured rating to Ba1 from Baa3. The outlook
on both entities remains negative.
RATINGS RATIONALE
The downgrade reflects weak credit metrics that did not improve in
line with Moody's expectations for the previous Baa3 rating. The
credit metrics weakness is a consequence of rising cost of debt,
weakening asset valuations and a higher debt volume following the
largely debt-funded acquisitions of Immofinanz AG (Immofinanz) and
S IMMO AG (S IMMO) that reflect an aggressive approach to financial
policy and risk management. The negative outlook reflects CPI's
weak position in the Ba1 rating category considering the challenge
to restore credit metrics considering the loss of equity credit for
hybrids, address upcoming medium-term refinancing needs and address
structural complications in the group. Moody's continue to
positively acknowledge CPI's robust operating performance and
implemented disposal activities. However, additional measures are
required to restore its credit metrics.
Excluding the impact of the loss of equity credit of hybrids post
downgrade, Moody's expect Moody's-adjusted debt/asset to be above
50% for 2024 considering some further mid-single-digit value
declines. More importantly, Moody's-adjusted fixed charge cover is
less likely to recover materially in the next months from 1.8x at
of LTM March 2024. After the downgrade, the hybrid instruments lose
equity credit as per Moody's Hybrid Equity Credit methodology.
Consequently Moody's-adjusted debt/asset will be above 55% in the
next 12-18 months, while interest cover will be in the 1.6-1.8x
range. CPI's weighted average cost of debt will continue to
increase with refinancings and the shoring up of liquidity to
tackle refinancings mainly focusing on 2026 and 2027.
Structural challenges currently exist from a non-full ownership of
by now the largest part of CPI's total asset base via Immofinanz,
the minority disposal in Poland, and its investment in Globalworth.
CPI has announced the goal to simplify the corporate structure with
the potential squeeze out of minorities at S Immo and an assessment
of a potential combination with Immofinanz. The key credit aspect
is to maintain financial flexibility where currently CPI only has
partial ownership over a large part of its asset base.
CPI's business profile continues to supports it credit quality.
CPI's scale and quality of its operations result in solid operating
performance despite structurally negative trends especially in the
office sector. The company was able to execute the first part of
its disposal plan in a difficult transaction market. Further
disposals are the key element to accomplish the management's goal
of deleveraging the company and generating additional liquidity.
Moody's projections assume EUR1.5-1.6 billion of disposals in 2024
followed by EUR600 million in 2025, which are key both from a
capital structure and liquidity management perspective. Moody's
believe management is aware of steps required to be taken to
achieve structural improvements and get in line with its financial
policy, while full shareholder support in the form of equity
injections and full cut of dividends seem unavailable at this
point.
RATIONALE FOR THE OUTLOOK
The negative outlook reflects a combination of execution risks on
the ongoing disposals required to deleverage the capital structure,
address upcoming refinancing needs and resolving some of the
structural challenges of the group with relatively weak credit
metrics for the Ba1 rating rating also following the loss of equity
credit of hybrids post downgrade per Moody's Hybrid Equity Credit
methodology.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure is less likely at the moment given the
negative outlook but can develop if
-- CPI succeeds to simplify the group structure enabling
group-wide liquidity and credit management and retains a high
amount of unencumbered assets
-- Moody's-adjusted debt/assets reduces below 50%
-- Moody's-adjusted fixed charge cover sustains above 2.25x
Any upgrade considerations would test the metrics assuming 50%
equity credit for hybrids.
Negative rating pressure can develop if
-- Failure to retain sufficient liquidity, including ensuring
intra-group liquidity flows and sufficient bankable unencumbered
property assets
-- Operating performance deteriorates
-- Failure to deliver disposals or other measures to enable a more
sustainable capital structure and interest cover
-- Moody's-adjusted debt/assets remain well above 55%
-- Moody's-adjusted fixed charge cover fails to remain above 1.8x
in 2024 and improve towards 2x thereafter
A notching down of senior unsecured ratings from the CFR can occur
if meaningful further unencumbered assets get pledged as collateral
under secured loans, despite the presence of loss-absorbing hybrid
capital.
LIQUIDITY
Moody's expect CPI to maintain an adequate liquidity profile in the
next 12 to 18 months. As of March 2024, the company has access to
EUR920 million cash and cash equivalents (out of which EUR281
million at CPI level, EUR289 million at Immofinanz level, and
EUR351 million at S IMMO level). CPI has drawn EUR460 million of
its EUR700 million revolving credit facility (RCF) due in 2026, and
had access to EUR100 million fully undrawn RCF at Immofinanz
level.
Since March 2024, the company has issued EUR500 million senior
unsecured notes, disposed of a 49% common equity stake in a company
owning office properties and retail assets in Poland for EUR250
million, and completed the disposal of several assets. CPI Property
Group used part of the proceeds to fully repay its bridge loan
related to the acquisition of S IMMO and repay the outstanding
revolving credit facility.
Together with funds from operations (estimated around EUR250
million) and material net proceeds from disposals (assuming CPI can
upstream cash from Immofinanz and S IMMO), CPI can cover capital
spending needs of EUR300-400 million per year, upcoming debt
maturities, and planned share buybacks / dividends comfortably in
2024 and 2025.
Starting 2026, the company will face about EUR2 billion of debt
maturities annually, partially secured loans and partially
unsecured debt. The majority of bond maturities starting 2026 are
on the CPI group level, while loan maturities are largely on
Immofinanz/S Immo level in 2024 and 2025. CPI has been successful
rolling secured debt given its asset performance, banking
relationships and moderate asset level leverage.
STRUCTURAL CONSIDERATIONS
The (P)Ba1 senior unsecured rating of the EMTN programme and the
Ba1 rating of the senior unsecured notes issued under the programme
are in line with CPI's Ba1 corporate family rating. The notes,
which are issued by CPI, rank pari passu with all other existing
and future senior unsecured obligations. The notes benefit from
financial covenants that limit the company's leverage to 60% and
issuance of secured debt to 45%, and set a minimum interest
coverage level of 1.9x. Moody's expect CPI's majority class of debt
to stay unsecured by a relatively small margin compared to secured
in the next 12-18 months. The subordinated notes issued by CPI
provide structural protection for senior unsecured noteholders. A
rising proportion of secured debt in CPI's capital structure could
result in a down-notching of the senior unsecured rating.
The (P)Ba3 junior subordinate rating of the EMTN programme and the
Ba3 rating of the junior subordinate notes issued under the
programme are two notches below CPI's senior unsecured rating. The
two-notch rating differential reflects the deeply subordinated
nature of the hybrid notes. After the downgrade to sub-investment
grade, the junior subordinate hybrid notes no longer qualify for
equity treatment under Moody's methodology. The hybrid issue is a
perpetual deeply junior subordinated debt instrument which is
treated as a preferred equivalent under Moody's methodology.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was REITS and Other
Commercial Real Estate Firms published in February 2024.
COMPANY PROFILE
As of March 2024, CPI Property Group (CPI) owned a diversified and
good-quality real estate portfolio worth EUR19.2 billion. The
company's properties in Central Europe (CE) account for 67% of its
portfolio. The portfolio's annualised net rental income is around
EUR754 million in 2023, along with additional net income from hotel
operations.
The company's portfolio split by value as of March 31, 2024 was 46%
office, 25% retail, 7% residential, 5% hotels and 17% other assets,
including land bank, developments, and industry and logistics
spaces.
=====================
N E T H E R L A N D S
=====================
JUBILEE PLACE 4: S&P Raises Cl. E-Dfrd Notes Rating to 'BB+ (sf)'
-----------------------------------------------------------------
S&P Global Ratings raised to 'AA+ (sf)' from 'AA (sf)', 'AA (sf)'
from 'A+ (sf)', 'A (sf)' from 'BBB (sf)', and 'BB+ (sf)' from 'B-
(sf)' its credit ratings on Jubilee Place 4 B.V.'s class B-Dfrd,
C-Dfrd, D-Dfrd, and E-Dfrd notes, respectively. At the same time,
S&P affirmed its 'AAA (sf)' rating on the class A loan and 'CCC
(sf)' rating on the class F-Dfrd notes.
S&P said, "Our ratings address timely receipt of interest and
ultimate repayment of principal for the class A loan, and ultimate
receipt of interest and repayment of principal for the class B-Dfrd
to F-Dfrd notes. Interest on each class except the class A loan is
deferrable until they become the most senior outstanding.
Previously deferred interest is due only at maturity.
"The rating actions follow our full analysis of the most recent
information received and reflect the transaction's current
structural features. Our review reflects the application of our
relevant criteria.
"The performance of the loans in the collateral pool since our
previous review has been stable. As of the May 2024 investor
report, arrears account for only 0.47% of the outstanding pool
balance and no losses have been recorded since closing.
"The weighted-average foreclosure frequency (WAFF) decreased at all
rating levels, because we reduced the originator adjustment to
account for the overall good historical performance of the six
Jubilee Place transactions that we have rated so far, and also
because of lower current loan-to-value ratios as a result of the
loans' amortization. The weighted-average loss severity (WALS)
increased at 'AAA' because of our higher real market value decline
(RMVD) assumption due to an overvaluation percentage update. The
WALS decreased for all other ratings because of the loans'
amortization, which offset the effect of the higher RMVD."
WAFF and WALS levels
RATING LEVEL WAFF (%) WALS (%)
AAA 20.12 49.76
AA 13.42 42.56
A 9.97 30.59
BBB 6.71 23.13
BB 3.26 17.61
B 2.40 12.54
WAFF--Weighted-average foreclosure frequency.
WALS--Weighted-average loss severity.
S&P's operational, legal, and counterparty risk analysis for the
transaction remains unchanged since closing.
The notes' sequential amortization has slightly increased available
credit enhancement for the class A loan and class B-Dfrd, C-Dfrd,
D-Dfrd, and E-Dfrd notes.
Credit enhancement levels
CREDIT ENHANCEMENT
CLASS CREDIT ENHANCEMENT (%)* AT CLOSING (%)*
A 15.84 14.93
B-Dfrd 9.47 8.93
C-Dfrd 6.56 6.18
D-Dfrd 4.43 4.18
E-Dfrd 1.78 1.68
F-Dfrd 0.45 0.43
X-Dfrd N/A N/A
*Including the liquidity reserve.
N/A--Not applicable.
The transaction has a liquidity reserve fund covering shortfalls in
senior fees, class S1 and S2 payments, senior swap payments, and
interest on the class A notes. Any excess over the required amount
will be released to the principal priority of payments and generate
credit enhancement for the rated notes.
The non-payment of interest on the class s1 and S2 certificates
would constitute an event of default. The amounts due on these
classes are small (EUR100,000). S&P has checked that interest is
paid timely for the class s1 and s2 certificates under its cash
flow scenarios.
S&P said, "Our model cash flow results have improved because of the
lesser swap outflow since closing due to the lower notional in swap
schedule, which helps to cure interest shortfalls, and the higher
amount collected from the swap counterparty as a result of the
rising interest rate environment--with three-month Euro Interbank
Offered Rate (EURIBOR) currently at 3.7% versus 0.0% at closing.
"In addition to our standard cash flow analysis, we also considered
sensitivity to reductions in excess spread caused by prepayments,
potential increased exposure to tail-end risk, potential further
rises in three-month EURIBOR, and the relative positions of
tranches in the fully sequential capital structures to determine
the ratings on the class A loan and class B-Dfrd to F-Dfrd notes.
"We therefore raised our ratings on the class B-Dfrd, C-Dfrd,
D-Dfrd, and E-Dfrd notes and affirmed our ratings on the class A
loan and F-Dfrd notes. The available credit enhancement for the
class A loan and class B-Dfrd to E-Dfrd notes is commensurate with
the assigned ratings.
"The class F-Dfrd notes do not pass at the 'B' rating level in most
scenarios, except the steady state run where we assume the actual
observed level of prepayments, actual servicing fees, and no
commingling stress. However, we believe that the repayment of the
class F-Dfrd notes is sensitive to high levels of prepayments, and
is dependent upon favorable economic, financial, and business
conditions. Therefore, based on our methodology for assigning 'B-'
and 'CCC' ratings, we have affirmed our 'CCC (sf)' rating on the
class F-Dfrd notes."
Jubilee Place 4 is a Dutch RMBS transaction that closed in June
2022 and securitizes a pool of buy-to-let loans secured on
first-ranking mortgages in the Netherlands.
===========
R U S S I A
===========
XALQ BANK: S&P Affirms 'B' ICRs, Alters Outlook to Positive
-----------------------------------------------------------
S&P Global Ratings revised its outlook to positive from negative on
Uzbekistan-based Xalq Bank. At the same time, S&P affirmed its
'B/B' long- and short-term issuer credit ratings on the bank.
S&P said, "We expect Xalq Bank to receive capital support from the
government in 2024, which will materially support its
capitalization. We understand that the government will provide
substantial capital support staggered through 2025. We now forecast
that Xalq Bank's risk-adjusted capital (RAC) ratio before
adjustments for concentration and diversification will strengthen
to 11.5%-12.5% over the next 12-18 months, from 6.8% as of year-end
2023. We believe our RAC ratio would remain above 10% over the next
two years, provided the bank maintains its current growth
strategy.
"We expect Xalq Bank will maintain its market positions over the
next two years and will continue performing its important social
function of distributing pensions and expanding its loan book. We
anticipate growth of Xalq Bank's retail loan book, alongside an
increase in lending to small and midsize enterprises (SMEs) and
private entrepreneurs under government support programs. We also
note that the bank has reported positive net results for 2023 after
years of losses. Its cost-to-income indicator diminished to 57%,
closer to the peer average, as of year-end 2023, from 63% in 2021.
We consider it will continue gradually improving its operating
efficiency and profitability indicators while increasing its
better-quality loan book.
"We expect Xalq Bank will continue increasing new business,
focusing on loans to retail clients and SMEs, and report positive
financial results over the next two years. Xalq Bank increased its
retail loans to about 61% of total loans as of Dec. 31, 2023, from
about 47% a year before. This material rebalancing of its loan
portfolio composition reflects the focus on increasing its retail
and SME lending in accordance with its new growth strategy. We view
as positive that the bank has been actively prioritizing commercial
lending over directed lending or lending under the government
programs, because this should improve its efficiency and
profitability indicators. At the same time, we note that its newly
generated lending book is not yet seasoned. It remains to be seen
whether the bank's improved underwriting and risk management
systems can manage rapid loan growth."
Xalq Bank remains the only agent of pension and social benefits
distribution in Uzbekistan and is set to continue increasing its
lending to SMEs and retail clients. S&P said, "In our view, these
activities are important for the government. Therefore, we believe
the government will continue providing capital support, among other
measures, to ensure the bank can continue performing its important
role. We continue to consider Xalq a government-related entity with
a moderately high likelihood of receiving timely and sufficient
government support in case of need. At the same time, we no longer
incorporate additional notches of government support in our
long-term issuer credit rating on Xalq Bank. This is in accordance
with our view on the bank's creditworthiness and the level of
sovereign ratings."
S&P said, "We consider that Xalq Bank's asset quality has improved,
reflecting its management's efforts on recovery of legacy problem
loans and focus on healthier new business. We believe Xalq Bank's
management faced a prolonged period of restructuring the business
by allocating substantial resources to reduce the legacy problem
loan portfolio. Problem loans, which are defined as stage 3 loans
under International Financial Reporting Standards, accounted for
23.5% of total loans as of year-end 2023, versus our estimate of
about 7.2% on average for Uzbekistan's banking sector on that date.
We recognize that the bank has managed to stabilize the asset
quality of its legacy problem loans and new loans are of better
quality. We also consider that further substantial reduction of
legacy problem loans will take time. Therefore, Xalq Bank's
profitability and asset quality indicators will remain under
pressure over the next two years. We expect its problem loans to
decrease to 18%-22% of total loans over the next two years while
its credit costs will continue normalizing toward 3%, which is
still much higher than the 1.8%-2.0% we forecast for the Uzbek
banking sector over the same period.
"The positive outlook reflects our expectation that the
government's capital support will strengthen Xalq Bank's
capitalization and support its creditworthiness over the next 12
months. We also think the bank's financial performance and business
activity will improve, and its legacy problem loans will continue
diminishing. We expect the bank to continue playing an important
social role of distributing pensions, which makes its business
profile different from that of other state-owned banks.
"We could raise our ratings if Xalq Bank manages to materially
reduce its nonperforming loans ratio close to the system average
and we considered that the bank's capital management has
significantly improved.
"We could consider revising our outlook to stable over the next 12
months if, contrary to our expectations, the bank's balance sheet
does not improve. This includes asset quality metrics, capital
injection, or capital management capabilities that are not
commensurate with the pace of growth."
=========
S P A I N
=========
AYT COLATERALES I: Moody's Hikes Rating on EUR3.8MM D Notes to B1
-----------------------------------------------------------------
Moody's Ratings has upgraded the ratings of the Class C and Class D
notes in AyT Colaterales Global Hipotecario Vital I, FTA and AyT
Colaterales Global Hipotecario Caja Cantabria I, two Spanish RMBS
transactions. The rating action reflects the increased levels of
credit enhancement for the affected notes and better than expected
collateral performance.
AyT Colaterales Global Hipotecario Vital I, FTA
EUR175.3M Class A Notes, Affirmed Aa1 (sf); previously on Mar 29,
2023 Affirmed Aa1 (sf)
EUR12.6M Class B Notes, Affirmed Aa3 (sf); previously on Mar 29,
2023 Affirmed Aa3 (sf)
EUR8.2M Class C Notes, Upgraded to Baa3 (sf); previously on Mar
29, 2023 Affirmed Ba2 (sf)
EUR3.8M Class D Notes, Upgraded to B1 (sf); previously on Mar 29,
2023 Upgraded to Caa1 (sf)
AyT Colaterales Global Hipotecario Caja Cantabria I
EUR203.5M Class A Notes, Affirmed Aa1 (sf); previously on Oct 26,
2023 Affirmed Aa1 (sf)
EUR12.7M Class B Notes, Affirmed Aa2 (sf); previously on Oct 26,
2023 Affirmed Aa2 (sf)
EUR10.3M Class C Notes, Upgraded to A3 (sf); previously on Oct 26,
2023 Upgraded to Baa2 (sf)
EUR3.5M Class D Notes, Upgraded to Baa1 (sf); previously on Oct
26, 2023 Affirmed Ba1 (sf)
Moody's affirmed the ratings of the notes that had sufficient
credit enhancement to maintain their current ratings.
Maximum achievable rating is Aa1 (sf) for structured finance
transactions in Spain, driven by the corresponding local currency
country ceiling of the country.
RATINGS RATIONALE
The rating action is prompted by an increase in credit enhancement
for the affected tranches and better than expected collateral
performance.
Increase in Available Credit Enhancement
In both transactions, largely sequential amortization and a reserve
fund that cannot amortise led to the increase in the credit
enhancement available in these transactions.
For instance, in AyT Colaterales Global Hipotecario Vital I, FTA
the credit enhancement for Classes C and D increased to 9.7% and
5.9% from 8.4% and 4.6% since the last rating action.
In recent payment dates, the amortization has switched several
times from pro-rata to sequential and vice versa, depending on the
long-term delinquencies level at that time. Should long-term
delinquencies increase, the tight performance-related triggers on
the notes could be breached again, switching back to sequential
amortization. Pro-rata amortization also stops and changes to
strictly sequential principal amortization once the pool factor is
lower than 10% (currently at 26.7%) or if the reserve fund is drawn
below the target amount.
In the most recent payment date, falling long-term delinquencies of
the pool led to the performance-related triggers on the mezzanine
and junior notes to be met, allowing for pro-rata amortisation
across the entire capital structure.
Separately, Moody's note that the reserve fund performance-related
trigger is breached given the cumulative defaults (3.13% of
original balance) have already exceeded the trigger level (2.50%),
preventing the reserve fund from amortising.
Similarly, in the case of AyT Colaterales Global Hipotecario Caja
Cantabria I, the credit enhancement for Classes C and D increased
to 16.9% and 12.5% from 15.3% and 11.3% since the last rating
action.
With the only exception of two payment dates in 2021, the
performance-related triggers on the mezzanine and junior notes have
been breached, forcing sequential amortisation. In particular, the
reserve fund is not fully funded, at 96.1% of its target. As in the
other transaction, Moody's note that the reserve fund
performance-related trigger is breached given the cumulative
defaults (4.4% of original balance) have already exceeded the
trigger level (3.2%), preventing the reserve fund from amortising.
Should the reserve fund become fully funded and long-term
delinquencies remain at current low levels, the performance-related
triggers on the mezzanine and junior notes could also be met
allowing for pro-rata amortisation across the entire capital
structure. In that scenario, the issuer's available funds would be
allocated to reach the Class A to D target ratios (percentages of
outstanding notes) contemplated in the transactions' documentation,
back to the notes' percentages observed in 2021.
Revision of Key Collateral Assumptions:
As part of the rating action, Moody's reassessed Moody's lifetime
loss expectation for the portfolio reflecting the collateral
performance to date in both transactions.
The collateral performance has continued to be stable in both
transactions. Total delinquencies have slightly decreased in the
past year, with 90 days plus arrears currently standing at 0.62%
and 0.66% of current pool balance for AyT Colaterales Global
Hipotecario Vital I, FTA and AyT Colaterales Global Hipotecario
Caja Cantabria I, respectively. Cumulative defaults currently stand
at 3.13% and 4.40% of original pool balance for AyT Colaterales
Global Hipotecario Vital I, FTA and AyT Colaterales Global
Hipotecario Caja Cantabria I, respectively and nearly unchanged
from a year earlier.
Moody's slightly reduced the expected loss assumption to 3.24% and
2.75% as a percentage of current pool balance from 3.25% and 3.01%
for AyT Colaterales Global Hipotecario Vital I, FTA and AyT
Colaterales Global Hipotecario Caja Cantabria I respectively, due
to the stable performance. The revised expected loss assumptions
for AyT Colaterales Global Hipotecario Vital I, FTA and AyT
Colaterales Global Hipotecario Caja Cantabria I correspond to 2.55%
and 2.70% respectively as a percentage of original pool balance and
down from previous assumptions of 2.67% and 2.86%.
Moody's have also assessed loan-by-loan information as a part of
Moody's detailed transaction review to determine the credit support
consistent with target rating levels and the volatility of future
losses. As a result, Moody's have maintained the MILAN Stressed
Loss assumption at 10% for AyT Colaterales Global Hipotecario Vital
I, FTA and 9.4% for AyT Colaterales Global Hipotecario Caja
Cantabria I.
The principal methodology used in these ratings was "Residential
Mortgage-Backed Securitizations" published in May 2024.
Factors that would lead to an upgrade or downgrade of the ratings:
Factors or circumstances that could lead to an upgrade of the
ratings include (1) performance of the underlying collateral that
is better than Moody's expected, (2) an increase in available
credit enhancement, (3) improvements in the credit quality of the
transaction counterparties and (4) a decrease in sovereign risk.
Factors or circumstances that could lead to a downgrade of the
ratings include (1) an increase in sovereign risk, (2) performance
of the underlying collateral that is worse than Moody's expected,
(3) deterioration in the notes' available credit enhancement and
(4) deterioration in the credit quality of the transaction
counterparties.
HYPESOL SOLAR: S&P Cuts SPUR to 'BB-', On CreditWatch Negative
--------------------------------------------------------------
S&P Global Ratings lowered the S&P underlying Rating (SPUR) on
Hypesol Solar Inversiones' debt to 'BB-' from 'BB+' and placed it
on CreditWatch with negative implications because S&P expects the
project will need to tap into the reserves to meet debt service
obligations. Moreover, S&P sees risk of another downgrade if market
conditions further deteriorate and the liquidity position weakens.
At the same time, S&P affirmed its 'AA' issue rating on the class A
senior secured debt, for which the outlook remains stable,
mirroring that on monoline insurer Assured Guaranty (Europe) SA
(AGE; AA/Stable/--).
In 2020, Hypesol (the issuer) issued EUR325.6 million of senior
secured debt, fully amortizing, fixed-rate notes, due June 30,
2037. At financial close, the issuer on-lent the bond proceeds to
Helios I and Helios II (together ProjectCos or Helios), on similar
terms and conditions as those of its own bond issuance. Helios I
and Helios II operate two concentrated solar power (CSP) plants in
Ciudad Real in Spain, generating cashflows by converting sunlight
into electricity. Each plant has a nominal capacity of 50 megawatts
(MW) and benefits from the special regime for renewable projects in
Spain until 2037.
Hypesol's regulated remuneration is at risk as it is now positioned
worse to withstand this market's perfect storm until 2026. S&P
said, "Unpaid curtailments, which we have considered a risk factor
for Hypesol, have remained somewhat aligned in 2024 to date with
our assumption of 15%. However, what we did not expect was for
Spain to experience a significant amount of zero and negative hours
this year in the electricity market, due to a harmful combination
of weaker electricity demand and excess supply of renewable energy
as production was boosted by distinctive weather conditions. In the
first five months of 2024, we understand that about 38% of
Hypesol's production was generated when prices were at zero or
negative for periods of six or more consecutive hours, and the
production during these intervals does not count toward the
computation of the minimum equivalent hours of production. Under a
90% probability production [P-90], the minimum equivalent hours of
production represent on average about 80% of the production levels
we estimate. In other words, the combined effect of Hypesol's issue
of unpaid curtailment and systemic risk of negative hours, even if
as not material as it was earlier this year, can erode Hypesol's
Rinv, which under our assumptions represents more than 70% of total
revenue in a given year."
Under-remuneration can result in Hypesol drawing on its liquidity
reserves to service the debt obligations in the short term. S&P
said, "For the remainder of the year, we expect some recovery in
wholesale prices and solar capture rates, supported mainly by an
increase in demand, which in turn grants gas quotation a bigger
role in electricity price setting. Yet, the resulting capture
prices will be, in our view, significantly below the levels the
government assumed when drafting the parameters applicable for this
semiregulatory period (EUR100/MWh in 2024 and EUR80/MWh in 2025),
which reinforces the situation of under-remuneration for Hypesol
since the revenue from the remuneration on operations (Ro) is zero
at the moment. This is the case because the Ro is meant to cover
the shortfall between pool revenue and the standard costs of
operating the plant, but with prices of EUR80-EUR100/MWh, there was
no shortfall expected. Without a significant positive development,
we forecast the project will need to withdraw from its reserves to
meet payment obligations in the next 12 months. This is why we
focus on the project's resiliency in the downside case."
S&P said, "The negative CreditWatch reflects our belief that
Hypesol will need to rely on its liquidity reserves to service the
debt obligations in the short term and that we could lower the SPUR
in the coming months if we believe that Hypesol's liquidity
position will fall materially, because the project has withdrawn
more funds than expected to meet debt service obligations given a
more severe cut on the project's Rinv either because of even lower
prices or more curtailment.
"We could affirm the SPUR if we believe that the project's
liquidity positions were robust enough to endure adverse market
conditions."
Downside Case
Assumptions
-- Captured solar electricity price: EUR30/MWh for 2024 and
EUR25/MWh for 2025.
-- Reasonable rate of return: 7.398% until December 2031 and 5.58%
thereafter, in line with the remuneration of regulated networks.
-- Generation: P-99 one-year.
-- Availability: 92.5%
-- Degradation: 0.25% per year.
-- Curtailment: 20% per year, other than the implicit curtailments
already embedded in our lower captured electricity prices.
-- Operation and maintenance (O&M) costs: 15% above contractual
price per plant.
-- Insurance: 15% above project's budget.
-- Management fees: 5% above project's budget.
-- Other operating costs: 10% above project's budget.
-- Letter of credit (LoC) cost: interest cost of EUR450,000 per
year.
-- Inflation: 1% above S&P Global Ratings' macroeconomic
assumption for the first five years.
-- Promissory mortgage execution: Payments of about EUR4 million
in December 2026, calculated on the debt balance.
Key metrics
-- There is limited confidence that the project would maintain
DSCRs above 1.0x under the downside stress period.
-- However, the project is expected to be able to withstand a
short stress period before depleting its liquidity reserves.
===========
T U R K E Y
===========
ARAP TURK: Fitch Affirms 'B-' LongTerm IDR, Outlook Positive
------------------------------------------------------------
Fitch Ratings has affirmed Arap Turk Bankasi A.S.'s (ATB) Long-Term
Foreign-Currency (LTFC) and Local-Currency (LTLC) Issuer Default
Ratings (IDRs) at 'B-' with Positive Outlooks. Fitch has also
affirmed the bank's Viability Rating (VR) at 'b-'.
Key Rating Drivers
Niche Franchise: ATB's ratings reflect the bank's concentration in
the volatile Turkish operating environment, its small niche
franchise within the trade-finance sector, weak profitability and
only adequate capitalisation. It also reflects contained
asset-quality risks, and stable, but concentrated, funding. The
Positive Outlooks reflect an improving operating environment in
Turkyie, which should result in improved performance that could
ultimately lead to an upgrade of the bank's ratings.
The bank's 'B' Short-Term IDRs are the only option mapping to
Long-Term IDRs in the 'B' category.
Improving but Challenging Operating Environment: ATB's operations
are concentrated in the improving but challenging Turkish operating
environment. The normalisation of monetary policy has reduced
near-term macro-financial stability risks and external financing
pressures but banks remain exposed to high inflation, potential
further lira depreciation, slowing economic growth, and multiple
macroprudential regulations, despite simplification efforts.
Small Trade-Finance Bank: ATB is a small Turkish trade-finance bank
primarily specialising in facilitating trade between Turkiye and
Libya, and, to a lesser extent, the Middle East and North Africa
region. The bank has close ties with its largest shareholder,
Libyan Foreign Bank (LFB; 62.4%), which provides it with low-cost
foreign-currency (FC) funding.
High FC Lending: ATB's underwriting standards compare fairly well
with Fitch-rated trade finance peers', although the bank faces
risks from its concentrated operations in challenging emerging
markets. On-balance sheet lending is mainly in FC (end-1Q24: 75% of
total loans) and therefore sensitive to Turkish lira depreciation.
Negligible Impairments: ATB's asset quality benefits from the
short-term nature of its loan book, as well as counter-guarantees
by Turkish banks against a significant proportion of its Libyan
country risk in its trade-finance operations. The bank's impaired
loans ratio was a low 0.1% at end-1Q24, while Stage 2 loans were
negligible. Nevertheless, asset-quality risk remains from high FC
lending and concentration in the volatile Turkish operating
environment.
Weak Profitability: ATB's operating profit remained subdued at 1.2%
of risk weighted assets (RWAs) in 3M24 after declining to 0.8% in
2023 due to rising operating costs fueled by inflation and
significant one-off impairment charges. The bank's profitability
remains below its historical average (four-year average 2.6%) due
to muted loan growth and a high cost-to-income ratio (3M24: 81%).
Nevertheless, ATB's net interest margin remained stable and above
the sector-average, benefiting from low-cost funding from its
parent.
Only Adequate Capitalisation: ATB's CET1 ratio remained stable at
17.0% (net of forbearance: 14.6%) at end-1Q24 (end-2023: 17.0%), as
internal capital generation offset RWA growth. Fitch views ATB's
capitalisation as only adequate considering the sensitivity of
capital to lira depreciation (84% of its balance sheet is in FC)
and its small capital base.
High Parent Funding: ATB is mainly wholesale-funded (62% of total
funding at end-1Q24), similar to other trade finance banks. ATB
relies heavily on FC funding from its parent, which accounted for
around 40% of total funding at end-1Q24. The remaining funding is
in the form of customer deposits, largely non-resident, from Libyan
clients. ATB is exposed to refinancing risk given its high reliance
on FC wholesale funding, although the short-term maturity profile
of the loan book and trade finance exposures supports liquidity.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
ATB's VR and IDRs could be downgraded due to a substantial
withdrawal in parent funding, prompting a significant reduction in
the bank's FC liquidity, or if the bank's CET1 ratio falls to
levels not commensurate with the bank's risk profile on a sustained
basis. ATB's IDRs are also potentially sensitive to a sovereign
downgrade.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
ATB's ratings could be upgraded following an upward revision of its
operating environment score, which could follow an upgrade of the
Turkish sovereign, provided that the operating environment should
enable the bank's performance to improve
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The bank's National Long-Term Rating of 'BBB(tur)'/Positive
reflects its view of the bank's unchanged creditworthiness in local
currency relative to other Fitch-rated Turkish issuers'.
The bank's 'no support' Government Support Rating (GSR) reflects
Fitch's view that support from the Turkish authorities cannot be
relied on, given the bank's small size and limited systemic
importance. In addition, support from ATB's shareholders, while
possible, cannot be relied on in view of the uncertain political
environment in Libya.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The National Rating is sensitive to a change in the bank's
creditworthiness in LC relative to that of other Turkish issuers.
VR ADJUSTMENTS
The operating environment score of 'b' for Turkish banks is lower
than the category implied score of 'bb', due to the following
adjustment reasons: sovereign rating (negative) and macroeconomic
stability (negative).
The asset quality score of 'b' is below the category implied score
of 'bb', due to the following adjustment reason: concentrations
(negative).
ESG Considerations
ATB has an ESG Relevance Score for Management Strategy of '4',
reflecting the high regulatory burden on most Turkish banks.
Management ability across the sector to determine their own
strategy is constrained by regulatory intervention and also by the
operational challenges of implementing regulations at the bank
level. This has a moderately negative impact on banks' credit
profiles and is relevant to banks' ratings in combination 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 Prior
----------- ------ -----
Arap Turk
Bankasi A.S. LT IDR B- Affirmed B-
ST IDR B Affirmed B
LC LT IDR B- Affirmed B-
LC ST IDR B Affirmed B
Natl LT BBB(tur)Affirmed BBB(tur)
Viability b- Affirmed b-
Government Support ns Affirmed ns
[*] Moody's Takes Rating Actions on 8 Turkish Corporates
--------------------------------------------------------
Moody's Ratings has taken rating actions on eight non-financial
corporates domiciled in Turkiye. The rating actions follow the
recent upgrade of Turkiye's government bond ratings to B1 from B3
while maintaining a positive outlook. Turkiye's foreign-currency
bond ceiling was also raised to Ba3 from B2 and the local-currency
bond ceiling to Ba1 from Ba3.
Moody's have taken the following rating actions on eight Turkish
non-financial corporates:
-- Koc Holding A.S. (Koc Holding): Upgrade the corporate family
rating (CFR) to Ba3 from B2, maintain positive outlook
-- Turkcell Iletisim Hizmetleri A.S. (Turkcell): Upgrade the CFR
to B1 from B2, maintain positive outlook
-- Turk Hava Yollari Anonim Ortakligi (Turkish Airlines): Upgrade
the CFR to Ba3 from B2, maintain positive outlook
-- Turkiye Petrol Rafinerileri A.S. (Tupras): Upgrade the CFR to
Ba3 from B2, maintain positive outlook
-- Ordu Yardimlasma Kurumu (OYAK): Upgrade the CFR to B1 from B2,
maintain positive outlook
-- Turkiye Sise ve Cam Fabrikalari A.S. (Sisecam): Upgrade the CFR
to B1 from B2, outlook changed to stable from positive
-- Limak Cimento Sanayi ve Ticaret A.S. (Limak Cement): Upgrade
the CFR to B2 from B3, outlook changed to stable from positive
-- Eregli Demir ve Celik Fabrikalari T.A.S. (Erdemir): Upgrade the
CFR to B2 from B3, outlook changed to stable from positive
The national scale CFR of Erdemir has also been upgraded to A1.tr
from A3.tr.
Additionally, Moody's have taken rating actions on two enhanced
equipment trust certificate (EETC) transactions related to Turkish
Airlines: Bosphorus Pass Through Trust 2015-1A and the Japanese Yen
denominated, Anatolia Pass Through Trust, Class A and Class B, also
issued in 2015. Moody's upgraded the Class A certificates of the
Bosphorus transaction to Ba3 from B2. The Anatolia Pass Through
Trust Class A certificates were upgraded to Ba2 from B1 and the
Class B were upgraded to Ba2 from B1. The outlook on both Anatolia
Pass Through Trust and Bosphorus Pass Through Trust 2015-1A remains
positive.
A List of Affected Credit Ratings is available at
https://urlcurt.com/u?l=HoLZTT
RATINGS RATIONALE
The rating actions on these corporate issuers are a direct
consequence of the rating action on the Government of Turkiye. All
eight non-financial corporates are domiciled in, and have
substantial operating exposure to Turkiye.
KOC HOLDING RATINGS RATIONALE
The upgrade of Koc Holding's CFR to Ba3 from B2 reflects the credit
linkages and high exposure to the domestic operating environment in
Turkiye. However, the company has a diversified investment
portfolio with a number of mature, dividend generating investments
as well as exposure to export revenues, which allow the rating to
be one notch above the Government of Turkiye. The positive rating
outlook on Koc Holding is aligned with the positive outlook on the
sovereign rating and reflects the credit linkages of Koc Holding
with the Turkish government.
Koc Holding benefits from a relatively diversified portfolio of
investments in mature and high-growth companies, which diversify
the entity's dividend income. Koc Holding's portfolio will
generate, on average, a reliable dividend income stream, which is
expected to continue growing as most of the investment programs at
the level of key subsidiaries have been completed. The company has
a track record of maintaining strong financial flexibility and has
for many years maintained net cash positions. Koc Holding has a
flexible dividend policy, which can be adjusted downward if
necessary. As of March 31, 2024, the company has a net cash
position of $777 million.
The company is exposed to the geographic concentration of
investments to Turkiye and the volatility in the Turkish equity
market. Koc Holding benefits from a degree of natural hedge against
the depreciation of the Turkish lira because of the exposure of
various operating companies to US dollar- and euro-linked cash
flow.
The positive outlook mirrors that of the Government of Turkiye and
reflects Koc Holding's exposure to the country's political, legal,
fiscal and regulatory environment.
TURKCELL RATINGS RATIONALE
Turkcell's CFR was upgraded to B1 from B2 and its Baseline Credit
Assessment (BCA) to b1 from b2. As a primarily domestic business,
Turkcell's credit profile is exposed to the economic, political,
legal, fiscal and regulatory environment of the country and is
constrained at the rating of the Government of Turkiye. Its credit
profile is otherwise strong, as the leader in the Turkish mobile
telephony market. Turkcell continues to grow through significant
net subscriber adds and pricing increases generally in line or
above inflation. The company has conservative financial policies,
with a maximum net debt/EBITDA target of 1.5x (reported 0.6x as of
Q1 2024), good access to debt capital markets and strong
relationships with international banks. Government-related issuer
(GRI) assumptions for Turkcell of 'high' dependence and 'low'
support from the Turkish government remain unchanged.
The positive outlook mirrors that of the Government of Turkiye.
TURKISH AIRLINES RATINGS RATIONALE
The upgrade of Turkish Airlines' CFR to Ba3 from B2 and BCA to ba3
from b2 reflects the airline's strong operating profile, strong
recovery post covid-19 pandemic, low leverage, strong growth and
good liquidity position. The Ba3 rating also reflects the credit
linkages and high exposure to the domestic operating environment in
Turkiye. Moody's classify Turkish Airlines as a GRI because of the
Government of Turkiye's 49.12% ownership stake held through its
sovereign wealth fund.
GRI considerations for Turkish Airlines remain unchanged with
'moderate' government support assumption and 'high' dependence
assumption. The credit fundamentals of Turkish Airlines suggest a
higher rating level. Moody's assessment of Turkish Airlines'
government support assumptions has not changed as a result of this
rating action. However, the company's CFR and BCA are constrained
by the Government of Turkiye's B1 rating and Ba3 foreign currency
ceiling because of credit linkages with the sovereign.
Traffic data for the last two years has been strong and materially
above 2019 levels. The company's available seat kilometers (ASK)
and revenue passenger kilometers (RPK) in June 2024 were 38% and
41% above 2019 levels with a passenger load factor of 82% for the
last 12 months (LTM) to June 2024. As of March 31, 2024 (LTM),
Moody's adjusted leverage (measured as gross debt/EBITDA) was 2.1x
and the company's cash position was $4.9 billion compared to $13.6
billion Moody's adjusted debt, of which $3.3 billion are short
term. The airline has a net short position in the Turkish Lira with
9% of 2023 revenues collected in lira as opposed to 28% of total
expenses in lira. Additionally, a significant 41% of the passengers
it carries are international-to-international transfers as of Q1
2024, a revenue source which is less sensitive to the domestic
economy. However, the airline is materially exposed to the domestic
macroeconomic environment and is reliant upon the smooth
functioning of its Istanbul hub.
The positive outlook mirrors that on the Government of Turkiye's
rating and reflects Turkish Airlines' exposure to the country's
political, legal, fiscal and regulatory environment.
TURKISH AIRLINES RELATED EETCS
Moody's also upgraded the company's enhanced equipment trust
certificate financings. Bosphorus Pass Through Trust 2015-1A
certificates were upgraded to Ba3 from B2. For the Anatolia Pass
Through Trust transaction, the Class A notes and loans were
upgraded to Ba2 from B1 and the Class B notes and loans were
upgraded to Ba2 from B1. The two notch upgrades for each
transaction accompany the two notch upgrade for Turkish Airlines.
The ratings on each transaction remain constrained by the Ba3
foreign currency ceiling for Turkiye. However, the ratings on the
Anatolia transaction reflect piercing of the foreign currency
ceiling by one notch. Moody's believe that the 18 month liquidity
facilities provided by the Development Bank of Japan and the
domicile of the transaction in Japan are sufficient enhancements
that support the piercing by one notch as does Moody's estimates of
loan-to-value (LTV) of 32% and 35%, respectively. Notwithstanding
that the Bosphorus transaction also benefits from an 18 month
liquidity facility provided by the Paris head office of BNP
Paribas, Moody's do not pierce the foreign currency ceiling for
this transaction because of Moody's estimate of a relatively high
LTV of about 90%.
There is $127.892 million outstanding on the Bosphorus transaction,
which is secured by three Boeing 777-300ERs delivered new to
Turkish Airlines in 2015. The final scheduled payment date for this
transaction is March 15, 2027. There is approximately $20.670
million and $0.776 million outstanding on the Class A and Class B
obligations in the Anatolia financing. These amounts are the US
dollar equivalents of the Japanese Yen-denominated amounts
outstanding following the previous amortization payment in March
2024, using an exchange rate of 157. This transaction is secured by
three Airbus A321-200s delivered new in 2015. The final scheduled
payment dates for this transaction are September 15, 2024 and
September 15, 2027, respectively.
TUPRAS RATINGS RATIONALE
The upgrade of Tupras' ratings to Ba3 from B2 with a positive
outlook reflects the company's close credit links to the Government
of Turkiye and operational exposure to the country. The company's
core assets are located in Turkiye and a majority of its cash flows
are generated domestically and therefore Tupras' rating is
constrained by Government of Turkiye's rating. The rating outlook
on Tupras is aligned with the positive outlook on the sovereign
rating.
Tupras' rating is positioned one notch higher than the government
bond rating to reflect (1) its healthy financial profile and strong
liquidity position ahead of the notes maturing in October 2024; (2)
the dominant position in the Turkish market as the leading refiner;
and (3) exposure to a commodity business where its refined products
can be readily sold in the international markets. Given that
Turkiye is a net importer of diesel, Moody's expect that the
company's competitive position will endure should there be a
weakening of the economic environment such that it reduces domestic
demand for refined products. As of the last 12 months to March 31,
2024, Moody's-adjusted debt/EBITDA stood at 0.5x while adjusted net
debt/EBITDA stood at -0.4x. During 2023, diesel demand in Turkiye
grew by 6% compared to a year before, while jet fuel demand grew by
17% and gasoline grew 24%. Tupras has a strong liquidity position
with TRY74 billion ($2.3 billion) of unrestricted cash as of March
31, 2024. Moody's also forecast funds from operations in excess of
TRY52 billion ($1.5 billion) during 2024. Additionally, the company
actively manages its currency risk, and its cash flows are
naturally hedged from the lira depreciation because domestic sales
of petroleum products are indexed to the US dollar.
The rating positioning also takes into consideration its asset
concentration in Turkiye and the company's exposure to cyclical
market conditions inherent to the refining industry, an unstable
domestic currency and working capital swings that historically
resulted in volatile credit metrics. With the expectation of no
significant geopolitical disruptions, fuel demand and refining
margins are predicted to stabilize over the next 18 months.
The positive outlook mirrors that of the Government of Turkiye and
reflects Tupras' exposure to the country's political, legal, fiscal
and regulatory environment.
OYAK RATINGS RATIONALE
The upgrade of OYAK's rating to B1 from B2 reflects the company's
credit interlinkages with the sovereign. OYAK's rating reflects its
material exposure to the country. Even though OYAK's investments
are spread across different equities and other assets, there is a
high concentration in Turkiye. In addition, the rating is supported
by low net leverage, with market value based leverage (MVL) of
around 3% as of March 31, 2024 and adequate liquidity.
The rating also incorporates high asset concentration and exposure
to cyclical industries with the three largest equity investments,
Erdemir, OYAK Cimento Fab A.S. and OYAK Renault accounting for
around 40% of total portfolio value as of March 31, 2024. There is
also limited investment transparency because the remainder of the
asset portfolio is comprised of unlisted investments.
The company maintains an adequate liquidity profile. OYAK's
unrestricted cash balance of TRY50.5 billion as of March 31, 2024,
combined with expected dividend income to be received in the next
18 months and cash from real estate development projects, are
sufficient to meet all upcoming debt maturities of TRY48.4 billion,
together with expected net member payouts and operating expenses
over the same time frame.
Moody's assessment of OYAK's liquidity profile also incorporates
significant sources of alternate liquidity in the form of listed
securities which could be used to raise additional liquidity on
short notice if needed. In addition, OYAK's governance allows the
deferral of member payouts in the event of unexpected significant
cash calls from retired members, which also helps protect its
liquidity.
The positive outlook mirrors that on the Turkish government and
reflects OYAK's exposure to the country's economic, political,
legal, fiscal and regulatory environment.
SISECAM RATINGS RATIONALE
The upgrade of Sisecam's ratings to B1 from B2 and the outlook
change to stable from positive reflect its exposure to the Turkish
economy, with around 40% of its revenues generated in Turkiye, and
an additional 20% produced and exported from the country. Sisecam's
rating reflects its leading market position in Turkiye, balanced
revenue and product mix derived from its architectural glass,
automotive glass, glassware, glass packaging and chemicals
businesses which mitigates single product line exposure. The
company also benefits from an adequate financial profile and
liquidity position.
The rating also takes into account the company's geographic
concentration with 60% of revenues generated from Turkiye
operations and an ambitious capital expenditure programme to
increase its production capacity which will drive the company's
negative free cash flow generation during the next 24 months in a
period of depressed volume sales. Additionally, the company's
rating also factors in the high levels of short-term borrowings,
that represent around 41% of reported borrowings as of March 31,
2024.
The stable outlook reflects Moody's expectation that Sisecam will
maintain a stable operating performance despite the challenging
macroeconomic environment while maintaining adequate credit
metrics. The stable outlook also assumes that the company will
maintain an adequate liquidity position despite the significant
capacity growth projects.
LIMAK CEMENT RATINGS RATIONALE
The upgrade of Limak Cement's rating to B2 from B3 reflects the
credit linkages and high exposure to Turkiye's domestic operating
environment in Turkiye. The company benefits from supportive
domestic cement prices which were high during the last 18 months
and has allowed Limak Cement to generate positive free cash flow.
Nevertheless, the company has volatile operating metrics and
fluctuating profitability that is inherent to the company's
cyclical business profile and due to its exposure to coal input
prices and cement output prices. Limak Cement's Moody's adjusted
leverage was 2.8x as of December 2023 pro forma the recent $575
million bond issuance (the leverage calculation excludes monetary
gains and FX losses because they mostly come from the
hyperinflation accounting adjustments and foreign currency losses
related to debt items). Moody's expect leverage to remain around
3.0x to 3.5x over the next two years, supported by healthy cement
prices, albeit lower than in 2023 and strong cement demand in
Turkiye.
The B2 CFR reflects Limak Cement's (1) healthy market position in
the Turkish cement industry; (2) cost-effective operations and high
margins compared to local peers as the company benefits from
economies of scale; (3) barriers to entry due to relatively high
capital investment requirements and close relations with key
customers; and (4) favourable long term demand dynamics in Turkiye
underpinned by positive societal trends and growth in the
construction industry.
The rating also reflects the (1) relatively small scale of cement
production when compared to global peers; (2) high cyclicality of
the business which is inherent to the construction industry; (3)
the competitive nature of Limak Cement's domestic business combined
with volatile coal and cement prices; (4) history of negative free
cash flow except in 2023 when cement prices were elevated; and (5)
its product and geographical concentration which significantly
exposes the company to the domestic operating environment.
The stable outlook reflects Moody's expectation that Limak Cement
will maintain a stable operating performance with positive free
cash flow generation while it benefits from a supportive Turkiye
cement industry and maintain stable credit metrics over the next 12
to 18 months.
ERDEMIR RATINGS RATIONALE
The upgrade of Erdemir ratings to B2 from B3 reflects Moody's view
that the company's solid credit metrics remain well positioned
within the current rating category despite Erdemir's upcoming large
capital investment programme. Moody's expect the latter to result
in negative free cash flow and higher leverage during the next 2-3
years. The upgrade also factors in Moody's expectation that the
TRY24.4 billion ($750 million) inaugural senior unsecured debt
issuance has improved the company's liquidity profile, albeit
remains insufficient to cover the company's sizable short-term debt
maturities and committed capital investment during the next 12-18
months. Moody's expect the company to address the liquidity
shortfall with additional debt or delay the commissioning of
certain projects until most of the required funding is secured.
Moody's also forecast that similar to its financial strategy during
H1-2024, Erdemir will continue to opportunistically refinance the
company's sizable short-term debt maturities with longer tenor
debt.
Erdemir's B2 ratings reflects (1) its leading position in Turkiye's
flat steel market; (2) some flexibility in redirecting sales to
export markets if there is a decline in the domestic steel demand;
(3) a relatively low fixed cost base that has historically allowed
the company to remain profitable even throughout periods of
declining steel prices; (4) solid credit metrics within the current
rating level, with 2025 forecasted Moody's adjusted debt/EBITDA of
3.2x and EBIT interest coverage of 2.6x; and (5) manageable
foreign-currency risk, because most of the company's debt, cash and
revenue is denominated in or linked to the US dollar.
The B2 ratings also incorporate (1) the company's material exposure
to the domestic operating environment; (2) weaknesses in liquidity
with available sources insufficient to cover debt maturities and
committed capital investment over the next 12 months; (3) exposure
to the volatile prices of steel and feedstock; (4) cyclicality in
the company's end markets, with a moderate reliance on the domestic
construction and automobile industries; and (5) sizable capital
investment programme, that will result in negative free cash flow
and higher leverage during the next 2-3 years, despite the company
reducing dividend distribution during the same period.
The stable outlook incorporates Moody's expectation that the
company will continue to work towards improving its liquidity
profile during the next 12-18 months, while maintaining a strong
operating and financial performance.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
KOC HOLDING FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF
THE RATINGS
The ratings of Koc Holding could be upgraded if Turkiye's sovereign
rating is upgraded. This would also require no material
deterioration in the company's operating and financial performance,
market positions and liquidity.
Koc Holding's ratings could be downgraded in case of a downgrade of
Turkiye's sovereign rating and a lowering of the foreign-currency
bond ceiling. In addition, downward rating pressure could arise if
there are signs of a significant deterioration in liquidity or if
government imposed measures were to have an adverse impact on
corporate credit quality.
TURKCELL FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE
RATINGS
Turkcell's rating is constrained by the rating of the Government of
Turkiye. Moody's would consider an upgrade if the rating of the
Government of Turkiye is raised. This would also require no
material deterioration in the company's operating and financial
performance or its liquidity.
Turkcell's rating could come under pressure if there is downward
pressure on Turkiye's sovereign rating or if there is a material
deterioration in the company's liquidity.
TURKISH AIRLINES FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
The ratings of Turkish Airlines are constrained at one notch above
the rating of the Government of Turkiye and also by the foreign
currency ceiling. Moody's would consider an upgrade if both the
rating of the Government of Turkiye and the foreign currency
ceiling are raised. This would also require no material
deterioration in the company's operating and financial performance
and liquidity.
Turkish Airlines' ratings could be downgraded as a result of a
downgrade of the Government of Turkiye's rating or of the foreign
currency bond ceiling. In addition, downward rating pressure could
arise if there are signs of a deterioration in liquidity or there
is a sustained negative impact on earnings and cash flows from
softening of demand.
Changes in EETC ratings can result from any combination of changes
in Moody's estimates of aircraft market values, which will affect
estimates of loan-to-value; the underlying credit quality or
ratings of the airline issuer or lessee; or Moody's opinion of the
importance of particular aircraft models to an airline's network.
TUPRAS FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE
RATINGS
The ratings of Tupras could be upgraded if Turkiye's sovereign
rating is upgraded. This would also require no material
deterioration in the company's operating and financial performance,
market positions and liquidity.
Tupras' ratings could be downgraded as a result of a downgrade of
the Government of Turkiye's rating or of the foreign currency bond
ceiling. In addition, downward rating pressure could arise if plant
utilisation and net refining margins remain low for a sustained
period of time, leading to depressed credit metrics and a weakening
of the company's liquidity position.
OYAK FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE
RATINGS
OYAK's rating is constrained by the rating of the Government of
Turkiye. Moody's would consider an upgrade of the rating if the
rating of the Government of Turkiye is upgraded. This would also
require no material deterioration in the company's liquidity
profile, operating and financial performance.
OYAK's rating is likely to be downgraded in case of a downgrade of
Turkiye's sovereign rating. In addition, downward rating pressure
could arise if the company's liquidity profile, operating or
financial performance deteriorates on sustained basis.
SISECAM FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE
RATINGS
Positive pressure on the ratings could arise if the company's
liquidity profile significantly improves, the reliance on short
term debt reduces and there is no deterioration in its operating
and financial performance. An upgrade would also require the
company to generate positive free cash flow, maintain a Moody's
adjusted debt to EBITDA ratio below 4x and EBITA interest coverage
comfortably above 3.5x, both on a sustained basis.
The ratings of Sisecam could be downgraded in case of a continued
deterioration in the company's operating performance leading to a
Moody's adjusted debt to EBITDA ratio above 4.5x, EBITA interest
coverage ratio below 2.5x and sustained negative free cash flow
over time. In addition, downward rating pressure could arise if
there are signs of a deterioration in liquidity.
LIMAK CEMENT FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF
THE RATINGS
Positive pressure on the ratings could arise if the company's
Moody's adjusted gross debt/EBITDA remaining sustainably below
3.5x; Moody's adjusted EBIT/interest is higher than 2.5x; and
maintained positive Moody's-adjusted FCF with FCF/debt in the
mid-to-high single digit range in percentage terms. An upgrade
would also require a longer track record of stable operating
performance and the company displaying a commitment to maintaining
an adequate liquidity position at all times.
Downward rating pressure could arise if there are signs of a
deterioration in liquidity, if Moody's-adjusted gross debt/EBITDA
increases above 5x for a sustained period, Moody's-adjusted
EBIT/interest falls below 1.5x on a sustained basis or Moody's
adjusted FCF turns negative.
ERDEMIR FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE
RATINGS
Positive rating pressure could arise if Erdemir's liquidity profile
materially strengthens with structurally lower reliance on
short-term debt. This would also require no material deterioration
in the company's operating and financial performance.
Moody's would consider a downgrade of the rating, if Erdemir's
liquidity profile materially weakens on a sustained basis. In
addition, downward pressure could also arise if the company's
operating and financial performance deteriorates on a sustained
basis.
PRINCIPAL METHODOLOGY
The principal methodologies used in rating Turkcell Iletisim
Hizmetleri A.S. were Telecommunications Service Providers published
in November 2023.
=============
U K R A I N E
=============
UKRAINE: Fitch Lowers LongTerm Foreign Currency IDR to 'C'
----------------------------------------------------------
Fitch Ratings has downgraded Ukraine's Long-Term Foreign-Currency
(LTFC) Issuer Default Rating (IDR) to 'C' from 'CC'. Fitch
typically does not assign Outlooks to sovereigns with a rating of
'CCC+' or below.
Under applicable credit rating agency (CRA) regulations, the
publication of sovereign reviews is subject to restrictions and
must take place according to a published schedule, except where it
is necessary for CRAs to deviate from this schedule in order to
comply with the CRAs' obligation to issue credit ratings based on
all available and relevant information and disclose credit ratings
in a timely manner. Fitch interprets these provisions as allowing
us to publish a rating review in situations where there is a
material change in the creditworthiness of the issuer that Fitch
believes makes it inappropriate for us to wait until the next
scheduled review date to update the rating or Outlook/Watch status.
The next scheduled review date for Fitch's rating on Ukraine is 6
December 2024, but Fitch believes that developments in the country
warrant such a deviation from the calendar and its rationale for
this is set out in the first part (High weight factors) of the Key
Rating Drivers section below.
Key Rating Drivers
The downgrade reflects the following key rating drivers and their
relative weights:
HIGH
Start of Default-Like Process: The downgrade of Ukraine's LTFC IDR
reflects Fitch's view that the agreement in principle reached on 22
July between the government and some Eurobond holders on
restructuring terms, after parliament approved legislation last
week allowing the government to suspend commercial external debt
payments for three months, marks the start of a default-like
process. In Fitch's view, the reported agreement with external
commercial creditors constitutes a distressed debt exchange (DDE)
under its sovereign rating criteria, as it involves a material
reduction in terms, including reductions in principal amount and
interest, and extension of maturities.
On 18 July, the Ukrainian parliament approved legislation that
allows the government to temporarily suspend payments on state and
state-guaranteed external commercial debt. Fitch expects that the
sovereign will not service its external commercial debt, including
the 2026 Eurobond coupon due on August 1st, until a restructuring
agreement with bondholders is completed.
Restructuring Required by IMF Programme: The deal with bond holders
and the law on debt suspension are consistent with the government's
efforts to comply with its four-year USD15.6 billion Extended Fund
Facility IMF programme, which foresees a debt restructuring with
substantial debt reduction to create fiscal space and restore debt
sustainability. In late June, Ukraine completed the fourth review
under this programme.
Ukraine's ratings also reflect the following rating drivers:
'CCC-' LTLC IDR Affirmed: The higher rating for local-currency (LC)
debt reflects its expectation that Ukraine will continue to service
its LC debt and that LC debt will be excluded from a restructuring
agreement with external commercial creditors, partly because only
2.2% of it is held by non-residents, compared with 41.4% held by
National Bank of Ukraine (NBU) and 42% by domestic banks (mostly
state-owned banks).
This ownership structure would limit the benefits to Ukraine from
any LC debt restructuring by creating potential fiscal costs
(including bank re-capitalisation). In addition, such a
restructuring could create risks for financial sector stability and
impair the development of the domestic debt market.
High Deficits, Rising Debt: Maintaining IMF and official creditor
support is critical to meet high financing requirements derived
from the war. In its June review, Fitch forecasts that the general
government deficit will remain high at 17.1% of GDP in 2024, and
considered that significant fiscal consolidation will be
constrained by the continuation of the war (defence spending was
31.3% of GDP in 2023), maintaining elevated reliance on foreign
financing. Fitch also projected then that debt will increase to
92.5% of GDP in 2024, well above the projected 70.3% median for
'B'/'C'/'D' rated sovereigns, without including the impact of
external commercial debt restructuring.
Manageable Macro-Financial Risks: International reserves stood at
USD37.8 billion in June, but have declined over the past three
months due to increased FX sales. Greater exchange rate
flexibility, a credible policy mix and continued official support
in line with the IMF programme reduce risks to macroeconomic and
financial stability in the near term.
Near-Term Financing Availability: In June, Fitch projected external
budget financing requirements at USD39 billion in 2024, of which
USD23.1 billion was disbursed in 1H24. In mid-June, the G7 agreed
to provide a USD50 billion loan to Ukraine to be repaid with the
interest proceeds from frozen Russian assets, which could reduce
uncertainty regarding external financing sources in 2025.
Nevertheless, the risk of reduced US support after the November
elections, potentially weaker political support in Europe, and
limitations in local bank's capacity to absorb rising government
debt issuance means financing will remain challenging, in its
view.
Protracted War: Fitch anticipates the war will continue throughout
2024 and into 2025 within its current broad parameters. While it is
not clear either side could win a decisive advantage, there is also
no sign of a willingness to make concessions, so the war could
prove very protracted. Over a longer horizon, Fitch anticipates
some form of settlement, but view a 'frozen conflict' as more
likely than a sustainable peace deal, at least for a significant
period.
Ukraine has an ESG Relevance Score (RS) of '5' for both Political
Stability and Rights and for the Rule of Law, Institutional and
Regulatory Quality and Control of Corruption. Theses scores reflect
the high weight that the World Bank Governance Indicators (WBGI)
have in its proprietary Sovereign Rating Model. Ukraine has a low
WBGI ranking at the 29th percentile, reflecting the
Russian-Ukrainian conflict, weak institutional capacity, uneven
application of the rule of law and a high level of corruption.
Ukraine has an ESG Relevance Score of '5' for creditor rights given
Ukraine's 2022 deferral of external debt payments and its
expectation of a new restructuring.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
- The LTFC IDR would be downgraded to 'RD' and the affected
securities to 'D' if there is failure to make a payment on a
Eurobond in line with the original terms and within the applicable
grace period, or if a debt restructuring agreement is achieved with
bondholders involving a material reduction in the terms, and
following confirmation that the exchange will be executed.
- The LTLC IDR would be downgraded to 'CC' on increased signs of a
probable default event on local currency debt, for example, from
severe liquidity stress and reduced capacity of the government to
access financing.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
- Payment on external commercial debt in line with its original
terms indicating that the government is no longer pursuing a
commercial debt restructuring.
- The LTLC IDR would be upgraded on reduced risk of liquidity
stress, potentially due to more predictable sources of official
financing, greater confidence in the ability of the domestic market
to roll over government debt, and/or lower expenditure needs.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch's proprietary SRM assigns Ukraine a score equivalent to a
rating of 'CCC+' on the Long-Term Foreign-Currency (LT FC) IDR
scale. However, in accordance with its rating criteria, Fitch's
sovereign rating committee has not utilised the SRM and QO to
explain the ratings in this instance. Ratings of 'CCC+' and below
are instead guided by the rating definitions.
Fitch's SRM is the agency's proprietary multiple regression rating
model that employs 18 variables based on three-year centred
averages, including one year of forecasts, to produce a score
equivalent to a LT FC IDR. Fitch's QO is a forward-looking
qualitative framework designed to allow for adjustment to the SRM
output to assign the final rating, reflecting factors within its
criteria that are not fully quantifiable and/or not fully reflected
in the SRM.
Country Ceiling
The Country Ceiling for Ukraine is 'B-'. For sovereigns rated
'CCC+' and below, Fitch assumes a starting point of 'CCC+' for
determining the Country Ceiling. Fitch's Country Ceiling Model
produced a starting point uplift of zero notches. Fitch's rating
committee applied a +1 notch qualitative adjustment to this, under
the Balance of Payments Restrictions pillar, reflecting that the
imposition of capital and exchange controls since Russia's invasion
of Ukraine has not prevented some private sector entities from
converting local currency into foreign currency and transferring
the proceeds to non-resident creditors to service debt payments.
Fitch does not assign Country Ceilings below 'CCC+', and only
assigns a Country Ceiling of 'CCC+' in the event that transfer and
convertibility risk has materialised and is affecting the vast
majority of economic sectors and asset classes.
ESG Considerations
Ukraine has an ESG Relevance Score of '5' for Political Stability
and Rights as World Bank Governance Indicators have the highest
weight in Fitch's SRM and are therefore highly relevant to the
rating and a key rating driver with a high weight. As Ukraine has a
percentile rank below 50 for the respective Governance Indicator,
this has a negative impact on the credit profile.
Ukraine has an ESG Relevance Score of '5' for Rule of Law,
Institutional & Regulatory Quality and Control of Corruption as
World Bank Governance Indicators have the highest weight in Fitch's
SRM and are therefore highly relevant to the rating and are a key
rating driver with a high weight. As Ukraine has a percentile rank
below 50 for the respective Governance Indicators, this has a
negative impact on the credit profile.
Ukraine has an ESG Relevance Score of '4'for Human Rights and
Political Freedoms as the Voice and Accountability pillar of the
World Bank Governance Indicators is relevant to the rating and a
rating driver. As Ukraine has a percentile rank below 50 for the
respective Governance Indicator, this has a negative impact on the
credit profile.
Ukraine has an ESG Relevance Score of '5' for Creditor Rights as
willingness to service and repay debt is relevant to the rating and
is a rating driver for Ukraine, as for all sovereigns. As Ukraine
deferred external debt payments, which Fitch deemed as a distressed
debt exchange, and its expectation of a new DDE, this has a
negative impact on the credit profile.
Ukraine has an ESG Relevance Score of '4' for International
Relations and Trade, reflecting the detrimental impact of the
conflict with Russia on international trade, which is relevant to
the rating and a rating driver with a negative impact on the credit
profile.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
Entity/Debt Rating Prior
----------- ------ -----
Ukraine LT IDR C Downgrade CC
ST IDR C Affirmed C
LC LT IDR CCC- Affirmed CCC-
LC ST IDR C Affirmed C
Country Ceiling B- Affirmed B-
senior
unsecured LT C Downgrade CC
Senior
Unsecured-Local
currency LT CCC- Affirmed CCC-
===========================
U N I T E D K I N G D O M
===========================
IVC EVIDENSIA: S&P Alters Outlook to Stable, Affirms 'B' ICR
------------------------------------------------------------
S&P Global Ratings revised its outlook on IVC Acquisition Topco
Ltd. (IVC Evidensia's parent company) to stable from negative and
affirmed its 'B' long-term issuer credit rating. At the same time,
S&P affirmed the 'B' rating on the senior debt.
S&P said, "The stable outlook reflects our expectation that sound
sales growth and ongoing cost efficiencies will translate into
solid EBITDA generation such that adjusted leverage will decline to
approximately 7.5x in fiscal 2024, moderating to below 7x
thereafter. We expect the company to prioritize organic growth,
while at the same time, successfully integrating newly acquired
small clinics with limited cost and disruption. The outlook also
reflects our assumption that IVC will sustain positive FOCF.
"We base the outlook revision on IVCE's signs of operational
recovery and improved credit metrics, driven by revenue growth
mainly due to pricing and cost efficiencies in next few years.IVCE
has made progress in addressing its cost base by reducing staff
costs through the reduction in the number of support staff and
investing in digitalization and improving administration systems to
maximize staff's time spent treating pets, while weathering
inflationary pressures through price increases. Solid sales growth
is being fueled by price increases as volumes are down, although we
anticipate volumes will pick up from 2025 as pets bought during the
pandemic start turning five or six years old, a time when pets
start to require more veterinary attention. We already see
profitability gains in the course of 2024 and expect further gains
for full-years 2024 and 2025, ultimately leading to improved credit
metrics, namely a reduction in adjusted leverage and sustained
positive FOCF generation.
"In fiscal 2023, adjusted leverage stood at 8.5x and FOCF was
positive at about GBP103 million. This is broadly in line with the
forecasts we published on May 23, 2023. Coupled with solid
deleveraging and FOCF generation prospects for 2024 and 2025, this
supported our outlook revision to stable." Sales growth of 18.5% in
2023 to GBP3,372 million was driven by price increases across all
regions and high volumes for e-commerce, although North America
total sales decreased, driven by a market wide decline in volumes.
Organic growth accounted for 8.5% of total sales growth. S&P Global
Ratings-adjusted EBITDA margin declined by 50 basis points (bps) to
16.5% due to higher cost of goods sold with a higher proportion of
e-commerce revenues depressing the margin.
S&P said, "Half-year 2024 results show a 2.3% increase in reported
sales year on year, although we expect a much stronger second half
of the year as the business seasonality is skewed toward the fourth
quarter (July-September 2024) as pets need more treatments and
vaccines during summer as they spend more time outdoors." The
company's adjusted EBITDA margin has risen significantly by 300 bps
year on year, given cost savings on labor, a decline in raw
materials inflation, and cost benefits from digitalization and
internal process standardization applied in past years.
IVCE will report solid revenue growth, while margins should
continue improving through the cost efficiency measures benefits.
S&P forecasts revenue growth of about 6.5%-7.5% in 2024, driven by
strong price increases as volumes are down. North America remains a
particularly challenging market, with a decline in fiscal 2024 ,
despite price rises, as the number of new clients has declined.
Canada is an area of focus for the business both in terms of
topline and profitability initiatives supported by management
changes. The new management's focus on rationalizing the cost base
has led to a lower focus on organic volume in the clinics. That
said, the volume decline is driven by several factors including an
increase in cost of living, age of pets, as well as changes in
management.
S&P said, "Further to price increases, we anticipate a pickup in
volume in 2025 as "pandemic" pets reach an age where they will need
more care. Therefore, we estimate sales growth of 9.5%-10.5% in
2025. IVCE's investments in digital capabilities and operating
systems at clinics to support integration and ensure foundational
tech over the past couple of years, coupled with a reduction in
support staff, will continue to lead to profitability gains over
2024 and 2025. Procurement efficiencies and increased negotiation
power with suppliers post-merger with Vetstrategy are also
benefitting margins. That said, we expect S&P Global
Ratings-adjusted EBITDA margin to improve by 100 bps-150 bps in
2024 to 17.5%-18% and a further 200 bps-250 bps in 2025. We include
restructuring/business transformation costs in our adjusted EBITDA
metric.
"We anticipate adjusted leverage of about 7.5x in 2024 and below 7x
in 2025 and positive FOCF generation. The reduction in adjusted
leverage is mainly driven by earnings growth as we expect adjusted
debt to be broadly stable at GBP4.8 billion-$4.9 billion,
comprising about GBP4.1 billion of first-lien term loans and
adjustments related to pension liabilities, lease liabilities,
contingent considerations, and put options on minority stakes. We
anticipate IVCE will sustain the generation of positive FOCF, at
about GBP65 million-GBP75 million in 2024 and GBP150 million-GBP160
million in 2025."
IVCE completed the refinancing of its full capital structure in
November 2023. The transaction entailed a new $1,250 million term
loan B (TLB), a new GBP900 million TLB, a new EUR2,130 million TLB,
all with maturities in December 2028; and the extension of the
GBP618.5 million revolving credit facility (RCF) maturity to
February 2028. Proceeds were used to fully repay legacy debt
facilities of VetStrategy, including the GBP819 million term loans
and a GBP85 million payment-in-kind loan and associated breakage
costs. IVCE also repaid its legacy pound sterling- and
euro-denominated TLBs totaling GBP2,653 million and the GBP58
million drawn amount under the GBP618 million RCF. In February
2024, IVC upsized its GBP900 million term loan B7 by GBP243 million
and its EUR2,270 million term loan B8 by EUR147 million. IVCE used
the proceeds to repay its second-lien term loans of GBP238 million
and $212 million. In June 2024, IVCE repriced its $1,250 million
TLB, resetting the margin to S+475 bps from S+550 bps, leading to
modest savings of GBP6 million in cash interest paid.
IVCE shows a prudent acquisitions policy and is prioritizing
organic growth and positive cash flow generation. In the six months
to March 2024, acquisitions spending amounted to GBP69 million,
below management's previous expectations, including 27 deals across
35 sites. IVCE is following a more disciplined approach to mergers
and acquisitions (M&A) and average multiple paid per acquisition
have reduced. IVCE targets small clinics and hospitals in Europe
with a good operational track record that fit in well with the
current portfolio. The group already has a large scale following
the acquisition of VetStrategy and a meaningful presence in Europe,
being the No. 1 player in Canada, the U.K., France, and other
European markets, in the very fragmented veterinary services
market. Thus, inorganic growth is not currently a priority,
although it still generates a meaningful portion of growth. The
focus is on organic growth, sustained deleveraging, and positive
cash flow generation. Recent acquisitions include clinics in
Germany, Spain, Portugal, and the Nordics. The group continues to
follow a similar integration strategy, maintaining the small
clinics' independence in the sense that veterinaries make their own
decisions with regards to pet treatments , while price review
decisions and standardization and automation of internal systems
take place at group level. IVCE's owners continue to show its
strong commitment and support for IVCE, and a further capital
injection of GBP400 million is planned for September as committed
about one year ago, aimed at strengthening the cash balance,
enabling further investments in the business and selective M&A.
Regulatory risks are rising.
In May 2024, the Competition and Markets Authority (CMA) announced
its decision to initiate a market investigation for the supply of
veterinary services for household pets in the U.K., following a
review of consumer experiences and business practices in the
provision of veterinary services for household pets in September
2023. This is expected to be a 18-month process at the end of which
the CMA must report as to whether competition is working
effectively in the market and if not, whether it is minded to
impose remedies or make recommendations for remedial action by
other public bodies. The investigation is not specifically aimed at
IVCE. At this time, considering the uncertainty about the range of
outcomes, and possible related liabilities, S&P treats this as an
event risk and continue monitoring any developments.
In France, the regulator asserted that the constitutional documents
of a number of corporate veterinary groups (including IVCE) were
not compliant in that the practicing vets were not in effective
control. This resulted in a number of changes to the applicable
constitutional documents and IVCE is in the process of
consolidating the relevant corporate entities within a safe harbor
corporate structure, governed by the revised constitutional
documents. S&P has deducted related costs from its adjusted EBITDA
metric.
S&P said, "The stable outlook reflects our expectation that solid
sales growth and ongoing cost efficiencies will translate into
solid EBITDA generation such that adjusted leverage will decline to
around 7.5x in fiscal 2024, moderating to below 7x thereafter. We
expect the company to prioritize organic growth, while at the same
time, successfully integrating newly acquired small clinics with
limited cost and disruption. The outlook also reflects our
assumption that IVC will generate sustained positive FOCF.
"We could lower our ratings on IVC to 'B-' if adjusted leverage
remains elevated with no prospects of deleveraging toward 7x in the
next 12 months and FOCF turns negative. This could arise if demand
for veterinary services declines significantly, and price rises do
not offset the decline. This could also happen if overhead costs
and salaries are materially higher than our base case, leading to a
deterioration in profitability.
"Negative FOCF generation could stem from the group's inability to
generate strong earnings, control working capital, or a material
increase in interest burden. We would also view negatively a
sizable debt-funded acquisition, since this would delay IVC's
deleveraging and could compromise management's focus on organic
growth, although we view a large acquisition in the next 12 months
as very unlikely.
"Although we consider an upgrade unlikely in the coming 12 months,
we could raise the rating if the group demonstrated continual
strong growth in sales, as well as EBITDA and FOCF generation,
combined with a prudent financial policy committed to maintaining
S&P Global Ratings-adjusted debt to EBITDA below 5x permanently and
the private equity owner commits to maintaining it at this level."
PAVILLION 2022-1: Fitch Alters Outlook on 'Bsf' Rating to Positive
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Fitch Ratings has upgraded Pavillion Mortgages 2022-1 PLC's class B
and C notes, affirmed the others and revised the Outlook on the
class E notes to Positive from Stable. Fitch has also affirmed
Pavillion Mortgages 2021-1 PLC's notes.
Entity/Debt Rating Prior
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Pavillion Mortgages
2021-1 PLC
A XS2404211786 LT AAAsf Affirmed AAAsf
B XS2404212081 LT AAAsf Affirmed AAAsf
C XS2404213055 LT A+sf Affirmed A+sf
D XS2404213212 LT A+sf Affirmed A+sf
E XS2404213568 LT BBB+sf Affirmed BBB+sf
Pavillion Mortgages
2022-1 PLC
Class A XS2554836507 LT AAAsf Affirmed AAAsf
Class B XS2554836762 LT AA+sf Upgrade AAsf
Class C XS2554837570 LT A+sf Upgrade Asf
Class D XS2554837653 LT BBBsf Affirmed BBBsf
Class E XS2554837737 LT Bsf Affirmed Bsf
Transaction Summary
The transactions are prime standalone RMBS, comprising pools of
high loan-to-value (LTV) loans (predominantly 85-95% original LTV)
with a high proportion of first-time buyers (FTB). Both pools
contain more recent originations in their respective years.
KEY RATING DRIVERS
Upgrades Reflect Strong Asset Performance: The upgrades of
Pavillion 2022-1's class B and C notes reflect the strong
performance of the loans. The sustainable LTV has decreased to
104.0% from 107.7% at the previous review. The pools for both
transactions consist of loans originated with an LTV above 85%. The
weighted average (WA) original LTV is consequently higher for both
pools at 87.9% and 89.0% respectively compared with the Fitch-rated
RMBS average.
Liquidity Constrains Junior Notes' Ratings: Only the class A and B
notes in each transaction are able to access the liquidity reserve.
Notes rated in the 'AAsf' category and above need to withstand a
payment interruption event for Fitch. The liquidity provisions are
insufficient for the class C notes and junior notes to achieve a
rating above 'A+sf'.
Fee Deviation from Transaction Documents: The senior fees for both
transactions were modelled in line with the transaction
documentation. However, based on the 2023 data for Pavillion
2021-1, Fitch noted that the fee amounts paid were higher than
documented. Fitch conducted additional sensitivity testing to
assess the impact of the changes in fees, which was limited to the
class E notes.
Fitch did not have sufficient information to note if the fee
changes were sustained, due to the transactions having limited
history. Fitch will continue to monitor the fee developments and
act if it believes the observed changes are more permanent.
Positive Outlook Reflects Increased CE: Pavillion 2022-1's class E
notes will benefit from a build up in credit enhancement (CE) from
the static reserve fund as the notes continue to deleverage. In
particular, Fitch expects a sizable proportion of the pool to
pre-pay due to fixed to floating reversions in 2024-2025. The class
E notes also benefit from strong asset performance. Fitch has
assigned them a Positive Outlook to signal this positive pressure
on the rating.
High Concentration of FTBs: Approximately 70.6% of borrowers in
Pavillion 2021-1 and 74.3% of the borrowers in Pavillion 2022-1
portfolio are FTBs. Fitch considers that FTBs are more likely to
suffer foreclosure than other borrowers and considers their
concentration in this pool analytically significant. As per its
criteria, Fitch has applied an upward adjustment to foreclosure
frequency (FF) adjustment of 1.4x to each loan where the borrower
is an FTB. Given the impact on the FF, accessibility to affordable
housing for FTBs is a factor affecting Fitch's ESG scores.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The transactions' performance may be affected by adverse changes in
market conditions and the economic environment. Weakening asset
performance is strongly correlated with increasing levels of
delinquencies and defaults that could reduce CE available to the
notes.
Unanticipated declines in recoveries could also result in lower net
proceeds, which may make certain notes susceptible to downgrades,
depending on the extent of the decline in recoveries. Fitch tested
a 15% increase in the WAFF and a 15% decrease in the WA recovery
rate (RR), which would result in downgrades of up to two notches
for Pavillion 2021-1's class D and E notes and three notches for
Pavillion 2022-1's class E notes.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Stable to improved asset performance driven by stable delinquencies
and defaults would lead to increasing CE levels and potentially
upgrades. Fitch tested a decrease in the WAFF of 15% and an
increase in the WARR of 15%, which would result in upgrades of up
to two notches for Pavillion 2021-1 and three notches for Pavillion
2022-1.
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
Pavillion Mortgages 2021-1 PLC
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Prior to the transaction closing, Fitch reviewed the results of a
third-party assessment conducted on the asset portfolio information
and concluded that there were no findings that affected the rating
analysis.
Prior to the transaction closing, Fitch conducted a review of a
small targeted sample of the originator's origination files and
found the information contained in the reviewed files to be
adequately consistent with the originator's policies and practices
and the other information provided to the agency about the asset
portfolio.
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.
Pavillion Mortgages 2022-1 PLC
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset pool
and the transaction. Fitch has not reviewed the results of any
third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Prior to the transaction closing, Fitch reviewed the results of a
third-party assessment conducted on the asset portfolio information
and concluded that there were no findings that affected the rating
analysis.
Overall, and together with any assumptions referred to above,
Fitch's assessment of the information relied upon for the agency's
rating analysis according to its applicable rating methodologies
indicates that it is adequately reliable.
ESG Considerations
Pavillion Mortgages 2021-1 and Pavillion Mortgages 2022-1 have an
ESG Relevance Score of '4' for Human Rights, Community Relations,
Access & Affordability due to the concentration of FTBs, which have
a weaker credit profile than other borrowers and may affect the
transaction's credit risk. The proportion of FTBs is higher than
for other prime transactions, but is comparable with two high-LTV
transactions rated by Fitch. This has a negative impact on the
credit profile and is relevant to the ratings in conjunction with
other factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
PREFERRED RESIDENTIAL: Fitch Affirms 'B-sf' Rating on Cl. E1c Notes
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Fitch Ratings has affirmed Preferred Residential Securities 05-2
plc (PRS 05-2) and Preferred Residential Securities 06-1 plc (PRS
06-1), as detailed below.
Entity/Debt Rating Prior
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Preferred Residential
Securities 06-1 PLC
Class C1a 74038YAK2 LT AAAsf Affirmed AAAsf
Class C1c 74038YAM8 LT AAAsf Affirmed AAAsf
Class D1a 74038YAN6 LT A+sf Affirmed A+sf
Class D1c 74038YAQ9 LT A+sf Affirmed A+sf
Class E1c 74038YAS5 LT B-sf Affirmed B-sf
Preferred Residential
Securities 05-2 PLC
Class C1a 740377AK2 LT AAAsf Affirmed AAAsf
Class C1c 740377AM8 LT AAAsf Affirmed AAAsf
Class D1c 740377AQ9 LT A+sf Affirmed A+sf
Class E1c 740377AS5 LT B-sf Affirmed B-sf
Transaction Summary
The transactions are securitisations of seasoned non-conforming
residential mortgage loans originated by Preferred Mortgages
Limited. The loans are buy-to-let and non-conforming
owner-occupied.
KEY RATING DRIVERS
Deteriorating Asset Performance: The performance of the pools has
deteriorated from the previous review, as shown by the significant
increase in one-month plus and three-month plus arrears. The
reported total arrears (one month plus, excluding repossessions)
for the transactions have increased to 34.3% from 25.9% (PRS 05-2)
and 26.2% from 20.1% (PRS 06-1) since the last review.
The growing number of arrears indicates borrowers' weakening
ability to meet their financial obligations, reflecting potential
liquidity constraints and deteriorating credit profiles. Persistent
financial stress could lead to higher default rates. Fitch tested a
number of scenarios stressing default and recovery rates across the
rating scale and found the ratings resilient to these scenarios,
supporting the affirmations.
Tail Risk: Both transactions have significantly paid down, with
PRS05-2 having 336 loans and PRS06-1 502 loans remaining. A low
number of loans presents increased concentration risk, which can
lead to the reserve fund becoming the primary, and potentially
insufficient, source of loss coverage. Given that both reserve
funds are under their respective targets, any loan defaults or
performance issues within the pool are likely to deplete the
reserve fund more rapidly.
This erosion of the reserve fund compromises its ability to cover
future losses, increasing the overall credit risk of the loan pool.
These risks are likely to impact the class D and E notes across
both transactions and will likely constrain any future upgrades.
Ratings below MIR: Fitch expects the recent deterioration in
performance and increase in arrears to continue and possibly result
in higher weighted average foreclosure frequency (WAFF) in future
reviews. Fitch also observes that the notes' model-implied ratings
(MIR) may be sensitive to lower recovery rates than those
calculated by Fitch's ResiGlobal model: UK. Fitch has recently
observed lower recovery rates than expected in some non-conforming
transactions. Consequently, all ratings except the class C1a/C1c
notes were constrained by one notch below the MIR to account for
these risks.
Increasing Credit Enhancement: Due to a breach of a trigger related
to arrear levels, the transactions amortise sequentially, resulting
in a build-up in credit enhancement (CE) for all classes of
collateralised notes. Both transactions benefit from non-amortising
reserve funds that also contribute to the build-up of CE.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative
Rating Action/Downgrade
The transactions' performance may be affected by adverse changes in
market conditions and the economic environment. Weakening economic
performance is strongly correlated to increasing levels of
delinquencies and defaults and could reduce CE available to the
notes.
Fitch found that a 15% increase in WAFF and a 15% decrease in the
WA recovery rate (RR) could lead to a downgrade of PRS 05-2's class
D notes of up to four notches and up to two notches for PRS 06-1.
Factors that Could, Individually or Collectively, Lead to Positive
Rating Action/Upgrade
Stable to improved asset performance driven by stable delinquencies
and defaults would lead to increasing CE and potentially upgrades.
Fitch found that decreasing the WAFF by 15% and increasing the WARR
by 15% would result in upgrades of up to two notches for PRS05-2's
class D notes and 11 notches for the class E notes. For PRS06-1,
this would result in an upgrade of up to three notches for the
class D notes and up to eight notches for the class E notes.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by,
Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the
information it has received about the performance of the asset
pools and the transactions. Fitch has not reviewed the results of
any third-party assessment of the asset portfolio information or
conducted a review of origination files as part of its ongoing
monitoring.
Fitch did not undertake a review of the information provided about
the underlying asset pools ahead of the transactions' initial
closing. The subsequent performance of the transactions over the
years is consistent with the agency's expectations given the
operating environment and Fitch is therefore satisfied that the
asset pool information relied upon for its initial rating analysis
was adequately reliable.
Overall, 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
PRS 05-2 and PRS 06-1 have an ESG Relevance Score of '4' for
Customer Welfare - Fair Messaging, Privacy & Data Security due to
material concentration of IO loans, which has a negative impact on
the credit profiles, and is relevant to the ratings in conjunction
with other factors.
PRS 05-2 and PRS 06-1 have an ESG Relevance Score of '4' for Human
Rights, Community Relations, Access & Affordability due to the
underlying asset pools with limited affordability checks and
self-certified income, which has a negative impact on the credit
profiles, and is relevant to the ratings in conjunction with other
factors.
The highest level of ESG credit relevance is a score of '3', unless
otherwise disclosed in this section. A score of '3' means ESG
issues are credit-neutral or have only a minimal credit impact on
the entity, either due to their nature or the way in which they are
being managed by the entity. Fitch's ESG Relevance Scores are not
inputs in the rating process; they are an observation on the
relevance and materiality of ESG factors in the rating decision.
VEDANTA RESOURCES: S&P Upgrades LT ICR to 'B-', Outlook Stable
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S&P Global Ratings raised its long-term issuer credit rating on
Vedanta Resources Ltd. as well as the issue ratings on its senior
unsecured bonds to 'B-' from 'CCC+'.
The stable outlook reflects S&P's view that the company will
proactively address the maturity of US$1.2 billion of debt in April
2026, with clarity over these plans by early 2025.
S&P said, "We believe Vedanta Resources has adequate internal funds
to meet US$1.4 billion of debt maturities due by end-2025. The
company raised about US$500 million by selling a 2.6% stake in its
subsidiary Vedanta Ltd. at the end of June. This, together with
potential dividends and brand fee from Vedanta Ltd., should help
the company meet its obligations even in the absence of any
external debt raising. Vedanta Resources' access to liquidity
through dividends has been boosted by the transfer of about US$1.25
billion of general reserves to retained earnings at Hindustan Zinc
Ltd., a 65% subsidiary of Vedanta Ltd. Vedanta Ltd.'s stronger
operating performance than we previously expected is also
contributing to a higher dividend paying ability.
"Debt reduction at Vedanta Resources is gradually making the
company's capital structure more sustainable. We estimate debt at
the Vedanta Resources level could decline by another US$1 billion
to about US$4.5 billion over the next 12 months. This is based on
our estimates of potential dividends and brand fee from Vedanta
Ltd. over this period. Accordingly, we estimate interest expenses
at the Vedanta Resources level will drop to US$550 million–US$600
million by the end of fiscal 2025 (ending March 31, 2025)."
Routine dividends and brand fee of at least US$1.1 billion per year
over the next few years should adequately cover interest expenses
and allow further deleveraging. This should make Vedanta Resources'
capital structure and debt servicing more sustainable, and could
improve funding access over time.
Refinancing of US$1.2 billion of debt due in April 2026 is the key
factor from a credit perspective. This includes US$600 million each
from a private credit facility and a bond issue. The refinancing of
the April 2026 bond issue has to be done by December 2025. If that
fails, the maturity of the company's January 2027 and December 2028
bonds, aggregating about US$2.4 billion, would accelerate to April
20, 2026. This could precipitate a liquidity stress. The potential
for these maturities to accelerate, together with the company's
untested funding access after its restructuring, significantly
constrains our analysis of its liquidity and the rating.
S&P said, "We believe the company will be proactive in refinancing
the US$600 million bond to avoid this maturity wall. Vedanta
Resources' strengthening cash flow position and the recent increase
in the valuation of Vedanta Ltd. shares improve funding
flexibility. In the event the company is unable to refinance this
debt externally, we believe it will be willing to look at strategic
options, such as further asset monetization, to raise the required
liquidity.
"We expect tangible progress on the refinancing at least a year
ahead of maturity, i.e. by April 2025. This is particularly
important as the company's fund-raising ability is highly dependent
on operating performance and market sentiment. The 'B-' rating also
assumes that the company will not consider any extension of debt
maturities, which we could consider a distressed transaction under
our criteria.
"Vedanta Resources' operating outlook is favorable and supportive
of refinancing efforts. We have revised upward our estimates of the
company's earnings. We believe EBITDA for fiscals 2025 and 2026
will be in the range of US$5.5 billion-US$6.0 billion annually. The
company's earnings are benefiting from favorable product prices and
cost reduction initiatives, particularly in the aluminum business.
We expect zinc EBITDA to increase about 25% and that for aluminum
almost 50% in fiscal 2025, more than offsetting our projected 40%
decline in oil earnings." The decline in the oil earnings is mainly
because the company recorded US$578 million in earnings in fiscal
2024 as a result of successful arbitration with the government on
profit sharing under its license.
Vedanta Ltd.'s US$1 billion equity raised is largely neutral from
Vedanta Resources' credit perspective. This is because the rating
remains constrained by liquidity in Vedanta Resources. Although the
expected prepayment of high-cost debt will improve consolidated
financial metrics, it does not contribute directly to improving
liquidity at Vedanta Resources. Nevertheless, it will reinforce the
company's funding ability and initiatives in deleveraging and
improving the overall capital structure.
S&P said, "The stable outlook reflects our expectation that the
company will proactively address its US$1.2 billion of 2026 debt
maturities, and that there would be clarity over the company's
plans by early 2025. The outlook also reflects our favorable view
of the company's underlying operations, which should support
refinancing efforts."
Downside rating pressure could emerge if Vedanta Resources'
liquidity position deteriorates and refinancing risks increase.
Absence of tangible progress on the refinancing of the April 2026
debt maturities by April 2025 would signal materially increased
refinancing risk. Any significant deterioration in operating
performance affecting Vedanta Ltd.'s dividend potential and Vedanta
Resources' refinancing ability could lead to this scenario.
Given that the rating is constrained by the company's weak
liquidity position, further upside will be contingent on a
sustained liquidity improvement. Sizable and timely fund raising to
address its 2026 debt maturities, supported by a lengthening debt
maturity profile and further debt reduction at Vedanta Resources,
would indicate such an improvement.
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S U B S C R I P T I O N I N F O R M A T I O N
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