/raid1/www/Hosts/bankrupt/TCREUR

/raid1/www/Hosts/bankrupt/TCREUR_Public/241023.mbx T R O U B L E D C O M P A N Y R E P O R T E R E U R O P E Wednesday, October 23, 2024, Vol. 25, No. 213 Headlines F R A N C E FINANCIERE LABEYRIE: EUR455MM Bank Debt Trades at 24% Discount I R E L A N D BNPP AM 2019: Fitch Hikes Rating on Class E Notes to 'BBsf' PALMER SQUARE 2023-3: Fitch Hikes Rating on Cl. E Notes to 'BB+sf' L U X E M B O U R G COVIS FINCO: EUR309.6MM Bank Debt Trades at 58% Discount UMAMI BIDCO: Fitch Assigns 'B+(EXP)' LongTerm IDR, Outlook Stable S W E D E N POLESTAR AUTOMOTIVE: All Proposals Approved at Annual Meeting S W I T Z E R L A N D HERENS MIDCO: Moody's Affirms 'B3' CFR & Alters Outlook to Stable U K R A I N E CITY OF DNIPRO: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' CITY OF KHARKOV: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' CITY OF KRYVYI RIH: Fitch Hikes LT Foreign Currency IDR to 'CCC' CITY OF KYIV: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' CITY OF LVIV: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' CITY OF MYKOLAIV: Fitch Hikes LongTerm Foreign Currency IDR to CCC CITY OF ODESA: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' CITY OF ZAPORIZHZHIA: Fitch Hikes LT Foreign Currency IDR to 'CCC' U N I T E D K I N G D O M AFFINITY LEASING: Butcher Woods Named as Joint Administrators ARTHUR MIDCO: Moody's Lowers CFR to B3, Outlook Remains Stable ASHTON BESPOKE: KRE Corporate Named as Joint Administrators CONSTELLATION AUTOMOTIVE: GBP325MM Bank Debt Trades at 25% Discount HAYNES AND SONS: JT Maxwell Named as Joint Administrators HBS GROUP: RSM Restructuring Named as Joint Administrators JOHN FLORENCE: Parker Andrews Named as Joint Administrators PIERPONT BTL 2024-1: Fitch Assigns BB(EXP)sf Rating on Two Tranches SAGA PLC: Moody's Lowers CFR to B3 & Alters Outlook to Stable SEVENTYNINE LIGHTING: Forvis Mazars Named as Joint Administrators - - - - - =========== F R A N C E =========== FINANCIERE LABEYRIE: EUR455MM Bank Debt Trades at 24% Discount -------------------------------------------------------------- Participations in a syndicated loan under which Financiere Labeyrie Fine Foods SASU is a borrower were trading in the secondary market around 76.1 cents-on-the-dollar during the week ended Friday, Oct. 18, 2024, according to Bloomberg's Evaluated Pricing service data. The EUR455 million Term loan facility is scheduled to mature on July 30, 2026. The amount is fully drawn and outstanding. Financiere Labeyrie Fine Foods sells seafood products. The Company prepares shrimp, duck items, salmon, sushi, trout, and foie gras. Labeyrie Fine Foods serves customers worldwide. The Company's country of domicile is France. ============= I R E L A N D ============= BNPP AM 2019: Fitch Hikes Rating on Class E Notes to 'BBsf' ----------------------------------------------------------- Fitch Ratings has upgraded BNPP AM Euro CLO 2019 DAC's class C-R to E notes while affirming the others. Entity/Debt Rating Prior ----------- ------ ----- BNPP AM Euro CLO 2019 DAC A-R XS2404665460 LT AAAsf Affirmed AAAsf B-1-R XS2404666195 LT AAsf Affirmed AAsf B-2-R XS2404666278 LT AAsf Affirmed AAsf C-R XS2404666351 LT A+sf Upgrade Asf D-R XS2404666609 LT BBB+sf Upgrade BBBsf E XS2014459148 LT BBsf Upgrade BB-sf F XS2014459494 LT B-sf Affirmed B-sf Transaction Summary BNPP AM Euro CLO 2019 DAC is a cash flow CLO comprising mostly senior secured obligations. The transaction closed in August 2019, it is actively managed by BNP Paribas Asset Management Europe and exited its reinvestment period in January 2024. KEY RATING DRIVERS Asset Performance Better Than Rating Case: Since Fitch's last rating action in January 2024, the portfolio's performance has been stable. As stated in the last trustee report dated 30 August 2024, the transaction is passing all its tests apart from the Fitch CCC portfolio profile test. The transaction is currently 0.2% below par (calculated as the current par difference over the original target par). Exposure to assets with a Fitch-derived rating of 'CCC+' and below is 7.7%, according to the trustee, compared to a limit of 7.5%. There are no defaulted assets in the portfolio but total par loss remains below its rating-case assumptions. This supports the rating actions. Limited Refinancing Risk: The transaction has manageable exposure to near- and medium-term refinancing risk, in view of the large default-rate cushions for each class of notes. The CLO has no portfolio assets maturing in 2024, 1% maturing in 2025, and a total of 3.3% maturing before June 2026, as calculated by Fitch. The transaction's comfortable break-even default-rate cushions supports the Stable Outlooks. 'B'/'B-' Portfolio: Fitch assesses the average credit quality of the underlying obligors at 'B'/'B-'. The weighted average rating factor (WARF) of the current portfolio is 27.2 as calculated by Fitch under its latest criteria. For the portfolio including entities with Negative Outlooks notched down one level under its criteria, the WARF was 28.6 at 12 October 2024. High Recovery Expectations: Senior secured obligations comprise 99.3% of the portfolio. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch-calculated weighted average recovery rate of the current portfolio was 62.7%. Diversified Portfolio: The portfolio is well-diversified across obligors, countries and industries. The top 10 obligor concentration, as calculated by Fitch, is 11.3%, and no obligor represents more than 1.4% of the portfolio balance. The exposure to the three-largest Fitch-defined industries is 28.5% as calculated by the trustee. Fixed-rate assets currently are reported by the trustee at 4.7% of the portfolio balance compared to the maximum of 5%. Transaction Outside Reinvestment Period: Although the transaction exited its reinvestment period in January 2024, the manager can reinvest unscheduled principal proceeds and sale proceeds from credit-risk obligations after the reinvestment period, subject to compliance with the reinvestment criteria. As of the August 2024 trustee report, the transaction is failing one portfolio profile test that currently restricts the manager from reinvesting. If the failing test is cured, the manager would be able to reinvest. Fitch's analysis is therefore based on a portfolio where Fitch stresses the transaction's covenants to their limits. Fitch tested the notes' achievable ratings across the Fitch test matrix as the portfolio can still migrate to different collateral quality tests. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Based on the current portfolio, downgrades may occur if the loss expectation is larger than initially assumed due to unexpectedly high levels of default and portfolio deterioration. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade Upgrades may occur if there is stable portfolio credit quality and deleveraging, leading to higher credit enhancement and excess spread being available to cover losses in the remaining portfolio. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY 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 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 BNPP AM Euro CLO 2019 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. For more information on Fitch's ESG Relevance Scores, visit the Fitch Ratings ESG Relevance Scores page. ESG Considerations Fitch does not provide ESG relevance scores for BNPP AM Euro CLO 2019 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 any ESG factor that is a key rating driver in the key rating drivers section of the relevant rating action commentary. PALMER SQUARE 2023-3: Fitch Hikes Rating on Cl. E Notes to 'BB+sf' ------------------------------------------------------------------ Fitch Ratings has upgraded Palmer Square European Loan Funding 2023-3 DAC's class B, C, D, and E notes and affirmed the class A notes. The Outlooks are Stable. Entity/Debt Rating Prior ----------- ------ ----- Palmer Square European Loan Funding 2023-3 DAC A XS2712134175 LT AAAsf Affirmed AAAsf B XS2712134332 LT AA+sf Upgrade AAsf C XS2712134415 LT A+sf Upgrade Asf D XS2712134506 LT BBB+sf Upgrade BBBsf E XS2712134688 LT BB+sf Upgrade BBsf Transaction Summary Palmer Square European Loan Funding 2023-3 DAC (the issuer) is an arbitrage cash flow collateralised loan obligation which is being serviced by Palmer Square Europe Capital Management LLC (Palmer Square). Net proceeds from the issuance of the notes have been used to purchase a static pool of primarily secured senior loans and bonds, with a target par of EUR400 million. KEY RATING DRIVERS Stable Performance; Amortising Transaction: The rating actions reflect the stable performance. The transaction is currently slightly above par with no defaulted assets, and the exposure to assets with a Fitch-derived rating of 'CCC+' and below is very low at 0.1%, according to the latest trustee report. In addition, the class A notes started amortising from May 2024, and EUR53 million has been repaid. This has led to an increase in credit enhancement across the capital structure. 'B' Portfolio: Fitch assesses the average credit quality of the obligors at 'B'. The Fitch-calculated weighted average rating factor (WARF) of the current portfolio is 24.1. High Recovery Expectations: Senior secured obligations comprise 98.8% of the portfolio as calculated by the trustee. Fitch views the recovery prospects for these assets as more favourable than for second-lien, unsecured and mezzanine assets. The Fitch-calculated weighted average recovery rate of the current portfolio is 64.8%. Diversified Portfolio: The largest three industries comprise 37.6% of the portfolio balance, the top 10 obligors represent 11.6%, and the largest obligor 1.2%. Static Portfolio (Positive): The transaction does not have a reinvestment period and discretionary sales are not permitted. Fitch's analysis is based on the current portfolio and stressed by applying a one-notch reduction to all obligors with a Negative Outlook (floored at CCC), which is 8.3% of the indicative portfolio. After the adjustment for Negative Outlooks, the WARF of the portfolio would be 24.7. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Based on the current portfolio, downgrades may occur if the loss expectation is larger than initially assumed, due to unexpectedly high levels of default and portfolio deterioration. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade Upgrades may occur if there is stable portfolio credit quality and deleveraging, leading to higher credit enhancement and excess spread being available to cover losses in the remaining portfolio. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY 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 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 Palmer Square European Loan Funding 2023-3 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 any ESG factor that is a key rating driver in the key rating drivers section of the relevant rating action commentary. =================== L U X E M B O U R G =================== COVIS FINCO: EUR309.6MM Bank Debt Trades at 58% Discount -------------------------------------------------------- Participations in a syndicated loan under which Covis Finco Sarl is a borrower were trading in the secondary market around 42.2 cents-on-the-dollar during the week ended Friday, Oct. 18, 2024, according to Bloomberg's Evaluated Pricing service data. The EUR309.6 million Term loan facility is scheduled to mature on February 18, 2027. About EUR286.3 million of the loan is withdrawn and outstanding. Covis Finco SARL is an entity affiliated with Covis Pharma, which is backed by Apollo Global Management. Covis Pharma distributes pharmaceutical products for patients with life-threatening conditions and chronic illnesses. Finco is the borrower under a term loan facility used to refinance existing debt and refinance the debt incurred to finance products acquired from AstraZeneca. Finco has its registered office in Luxembourg. UMAMI BIDCO: Fitch Assigns 'B+(EXP)' LongTerm IDR, Outlook Stable ----------------------------------------------------------------- Fitch Ratings has assigned Umami Bidco S.a r.l. (Umami) an expected Long-Term Issuer Default Rating (IDR) of 'B+(EXP)'. Fitch has also assigned its proposed EUR500 million senior secured, seven-year TLB an expected 'BB-(EXP)' rating with a Recovery Rating of 'RR3'/61%. The Outlook on the Long-Term IDR is Stable. The IDR reflects the strong position the company holds in the niche kitchen equipment market. The rating also reflects Umami's small size and modest product diversification, compared to wider industrial peers, and highly leveraged financial profile. Fitch expects the high initial pro forma gross leverage of 5.2x-5.7x to improve gradually through strong EBITDA generation and no shareholder returns to under 5x by 2027, a level Fitch views as supportive for the rating and the Stable Outlook. The assignment of the final ratings is contingent on completing the transaction in line with the terms already presented to us. Key Rating Drivers Strong EBITDA Margin and Market Positions: Umami's two key brands (Robot-Coupe and Magimix) operate as market leaders representing a growing segment of premium products in the niche kitchen equipment market. Umami's strong market position, supported by brand recognition and perceived quality, has allowed it to deliver consistently strong EBITDA margins over the past five years and Fitch expects further slight improvement in the short to medium term supported by new product launches and cost discipline. Fitch views Umami's healthy EBITDA margin as a key credit strength, reflecting its lean business model and premium-priced products with ability to pass on cost inflation. Rating Constrained by Leverage: Operational performance is strong, but the company's rating is constrained by its leverage. Fitch expects pro forma gross EBITDA leverage to gradually improve to under 5x by 2027. Fitch expects the company to progressively deleverage, through organic EBITDA growth and strong cash flow generation without major M&A or shareholder distributions. Moderately Good Diversification: The group's business profile has good geographical and customer diversification. About 47% of Umami's revenue is from EMEA, 36% from North America and 12% from APAC. The company benefits from a well-diversified customer base, with the top 10 customers contributing less than 15% of total revenue in 2023. Its rating case reflects the potential loss of the Nespresso distribution contract in 1Q25. The contract is unique and therefore, despite its significance, Fitch does not consider the loss detrimental to Umami's business profile or reflective of heightened risk of other contract losses. Low Capex, Strong FCF: The company operates an asset-light business model focused on development and assembly of products rather than in-house manufacturing. This approach results in low capital expenditure requirements, leading to high free cash flow (FCF) generation. During 2021-2023, the company achieved strong average FCF margins for the sector. Fitch expects strong FCF generation to continue, but expect the average FCF margin to be slightly lower, albeit still very high, due to higher interest payments resulting from increased debt following the transaction. Steady Strategy on Change of Control: Fitch does not expect the imminent change of Umami's control, which involves ARDIAN Holding private equity fund buying a majority stake in the company, to lead to a material change in business strategy or post-transaction financial policy. Fitch understands that Ardian intends to be supportive of present management and growth initiatives (both organic and inorganic, the latter limited) and assume that neither Ardian nor Hameur (the existing shareholders) will ask Umami to pay dividends in the foreseeable future. Derivation Summary Umami's business profile is primarily supported by its strong positions in growing premium niche markets. This is complemented by sound end-market and customer diversification, with significant exposure to the relatively resilient food service markets. Despite offering high-quality products, the group's product range and addressable market are limited compared to the wider benchmark of diversified industrial peers, which constrains its overall business profile. The group's post-transaction financial leverage profile will be broadly similar to other 'B' category industrial issuers, such as Fiber Bidco S.p.A. (B+/Stable), Evoca S.p.A. (B/Stable), Ahlstrom Holding 3 Oy (B+/Stable), ams-Osram AG (B+/Stable), and Nova Alexandre III S.A.S. (B+/Stable). In particular, Umami generates significantly higher EBITDA and FCF margins than diversified industrials peers, and Fitch expects its pro forma leverage and deleveraging profile to be stronger than these companies'. Key Assumptions Revenue to drop by 9% in 2025, due to non-renewal of Nespresso contract and to increase thereafter by a CAGR of about 5%, in line with industry growth and expansion into new and underpenetrated geographies New product launches and continued cost discipline supporting EBITDA margin Capex/revenue to remain stable and in line with historical levels No dividends distribution throughout its forecast horizon No M&As Successful launch of EUR675 million (equivalent) loans and revolving credit facility (RCF) of EUR125 million Recovery Analysis The recovery analysis assumes that Umami would be considered a going concern (GC) in bankruptcy and that it would be reorganized rather than liquidated. This is driven by its leading position in its niche market, historically robust operating and free cash flow generation. Fitch assumes a 10% administrative claim. Fitch expects an GC enterprise value available for claims at around EUR480 million, which reflects Umami's leading position within its niche market, good geographical diversification, and strong FCF generation. However, the enterprise value multiple also reflects the company's limited range of products and small scale. Fitch estimates the total amount of senior debt claims at EUR800 million, which includes the RCF of EUR125 million and senior secured euro term loan B of EUR500 million and senior secured US dollar term loan B of EUR175 million equivalent. The waterfall-generated recovery computation output score is 61% leading to ranked recovery for the senior secured debt of 'RR3', supporting the 'BB-(EXP)' debt rating one notch above the IDR. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade Sustained EBITDA leverage above 5.5x Sustained EBITDA interest coverage below 2.5x Less conservative financial policies including significant dividend upstreaming Structural loss of market position, leading to deterioration of EBITDA margin Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade Sustained EBITDA leverage below 4.5x Sustained EBITDA interest coverage above 3.0x Improved diversification and scale Liquidity and Debt Structure Comfortable Liquidity: Fitch expects the cash balance to be around EUR30 million after the transaction, while the debt structure will include long-term debt and the multi-purpose RCF, which Fitch expects to be undrawn. Strong FCF will also support liquidity. Issuer Profile Umami is the holding company for the France-based Robot-Coupe and Magimix brands, which are global providers of food preparation equipment. Robot-Coupe, which represents around 70% of revenue, provides premium benchtop equipment for professional use. Magimix makes kitchen appliances for retail end-markets. The company is present in over 130 countries and serves more than 7,000 distributors and importers. Date of Relevant Committee 10 October 2024 MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in its credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. ESG Considerations The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery ----------- ------ -------- Umami Bidco S.a r.l. LT IDR B+(EXP) Expected Rating senior secured LT BB-(EXP) Expected Rating RR3 =========== S W E D E N =========== POLESTAR AUTOMOTIVE: All Proposals Approved at Annual Meeting ------------------------------------------------------------- Polestar Automotive Holding UK PLC held its 2024 annual general meeting of shareholders, during which 2,336,668,466 votes of the Company's shares, which may be represented by American Depositary Shares, were represented in person or by proxy, constituting a quorum. Voting at the AGM was conducted by way of a poll, with each Class A ordinary share, Class C-1 ordinary share and Class C-2 ordinary share, which may be represented by ADSs, issued and outstanding as of the close of business on the record date entitled to one (1) vote, and each Class B ordinary share, which may be represented by ADSs, issued and outstanding as of the close of business on the record date, entitled to ten (10) votes, respectively, on each resolution at the AGM. The following are the voting results for the proposals considered and voted upon at the AGM, with resolutions 1 to 11 being ordinary resolutions that required more than 50% of shareholders' votes to be cast in favor and resolution 12 being a special resolution that required at least 75% of shareholders' votes to be cast in favor: Resolutions: 1. To receive the Company's annual report and audited financial statements for the period ended 31 December 2023. 2. To receive and approve the Directors' Remuneration Report for the period ended 31 December 2023. 3. To re-elect Dr. Karl-Thomas Neumann as a Director. 4. To re-elect Prof. Dr. hc Winfried Vahland as a Director. 5. To elect Ms. Francesca Gamboni as a Director. 6. To elect Ms. Christine Gorjanc as a Director. 7. To elect Prof. Xiaojie ("Laura") Shen as a Director. 8. To approve a new cash compensation level of USD 500,000 per annum for the Chair of the Board of Directors. 9. To approve an increase in the cash compensation of the Audit Committee to USD 30,000 per annum for the Audit Committee Chair and USD 15,000 per annum for the members of the Audit Committee, with retroactive effect from 1 January 2024. 10. To appoint Deloitte LLP and Deloitte AB as auditor of the Company, to hold office from the conclusion of this meeting until the conclusion of the next annual general meeting of the Company at which the Company's financial statements are laid before the shareholders. 11. To authorise the Audit Committee to determine the remuneration of the Auditor. 12. To authorise the calling of general meetings of the Company (not being an annual general meeting) by notice of at least 14 clear days. The shareholders approved all of the proposals. The results were in line with the recommendations made by Polestar's board of directors. As of October 7, 2024, Polestar had the following shares in issue with a total of 2,584,387,712 voting rights: (i) 2,060,461,997 Class A Ordinary shares each carrying one vote per share; (ii) 49,892,575 Class B Ordinary shares each carrying ten votes per share; (iii) 20,499,965 Class C-1 Ordinary shares each carrying one vote per share; and (iv) 4,500,000 Class C-2 Ordinary shares each carrying one vote per share. About Polestar Automotive Polestar Automotive Holding UK PLC manufactures and sells premium electric vehicles. The company was founded in 2017 and is headquartered in Gothenburg, Sweden. As of December 31, 2023, the Company had $4.1 billion in total assets, $5.4 billion in total liabilities, and $1.3 billion in total deficit. Gothenburg, Sweden-based Deloitte AB, the Company's auditor since 2021, issued a 'going concern' qualification in its report dated August 14, 2024, citing that the Company requires additional financing to support operating and development activities that raise substantial doubt about its ability to continue as a going concern. ===================== S W I T Z E R L A N D ===================== HERENS MIDCO: Moody's Affirms 'B3' CFR & Alters Outlook to Stable ----------------------------------------------------------------- Moody's Ratings has affirmed the B3 long-term corporate family rating and B3-PD probability of default rating of Herens Midco S.a.r.l. (Arxada), the parent company of Arxada AG. Concurrently, Moody's affirmed the Caa2 rating of Herens Midco S.a.r.l.'s EUR460 million senior unsecured notes as well as the B2 ratings of Herens HoldCo S.a.r.l.'s USD350 million guaranteed senior secured notes due 2028, EUR1,104.4 million and USD1,430 million senior secured term loan B due 2028 and the EUR430 million senior secured revolving credit facility (RCF) due 2028. The outlook on both entities has been changed to stable from negative. The rating action reflects: -- Moody's expectation that earnings will continue to improve in 2025 -- Arxada's reasonably resilient performance through the cycle -- The company's very high leverage and weak coverage metrics RATINGS RATIONALE Trading conditions for some of Arxada's end markets are showing signs of stabilisation after an extended period of destocking. The company reported EBITDA margins of 19% in Q2 2024, a 300 basis point improvement from 16% in Q2 2023 reflecting pricing initiatives, a reduction in the fixed cost base, and the effective execution of cost savings programmes. Moody's expect the company's earnings will improve further in the remainder of 2024, and again next year, which will be underpinned by increased volume from a customer-backed capacity expansion, the introduction of new and improved sustainable specialty chemical products and a sustained improvement in margins. Moody's expect the company to achieve Moody's adjusted EBITDA of around CHF440 million for 2025 in Moody's base case, a 19% increase from CHF369 million in the last twelve months ended June 2024. Arxada remains very highly leveraged. Moody's expect Arxada's Moody's-adjusted gross leverage (debt/EBITDA) of around 9.0x for the 12 months to December 31, 2024 and around 8.3x for 2025. Positively the company has completed the carve-out from Lonza Group AG and substantially completed the restructuring programme which was initiated to reduce the cost base and increase efficiencies. Moody's therefore expect non-recurring restructuring costs to dissipate during 2025 and the company to also benefit from tighter working capital management. However, overall in Moody's base case Moody's expect the company to materially reduce cash burn in 2025 to Moody's adjusted negative FCF of around CHF20 million from around negative CHF100 million projected in the Moody's base case for 2024. LIQUIDITY Arxada's liquidity is adequate. At the end of June 2024, the company reported a cash position of CHF85 million and it had availability of around CHF191 million under its EUR430 million revolving credit facility (RCF). It indicated that it will maintain sufficient capacity under the springing covenant to fully access the remaining undrawn RCF. Arxada's only maturing debt before January 2028 is the 1% annual amortisation of its term loan B dollar tranche paid quarterly. Moody's expect the company will increase drawings under the RCF in Q4 by around CHF30 million to fund higher-than-average capital spending and non-recurring tax payments. STRUCTURAL CONSIDERATIONS The B2 rating on the guaranteed senior secured notes and senior secured bank credit facilities, which comprise the USD350 million notes, the USD1,430 million Term Loan B, the EUR1,104.4 million Term Loan B and the EUR430 million senior secured RCF issued by Herens HoldCo S.a.r.l.— one notch above the CFR — reflects the EUR460 million senior unsecured notes issued by Herens Midco S.a.r.l., rated Caa2 and USD111 million senior unsecured notes ranking below the senior secured debt instruments in the capital structure. The senior secured debt instruments are guaranteed by a substantial number of subsidiaries of the group and secured on a first-priority basis by a significant amount of assets owned by the group. The guarantees from operating entities represent more than 80% of groupwide EBITDA. The Caa2 rating on the EUR460 million senior unsecured notes — two notches below the CFR — reflects the substantial amount of secured debt in the structure, as well as the senior subordinated nature of the guarantees by the same group of subsidiaries that guarantee the secured term loan on a first-priority basis. RATING OUTLOOK The stable outlook reflects Moody's expectation of an uplift in earnings over 2025 and a gradual improvement in credit metrics. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS It is unlikely positive pressure on the rating will develop over the next 18 months given the company's stretched capital structure and the lack of visibility for a material improvement in macro-economic conditions in 2025. Downward pressure on the rating would emerge if the company fails to achieve an improvement in operating performance such that credit metrics remain strained (including, but not limited to, interest coverage, measured by Moody's adjusted EBITDA to Interest Expense, adjusted for benefit of interest rate hedging, falling below 1.5x or the company's Moody's-adjusted debt/EBITDA remains above 8.0x); or the company does not generate positive FCF over the next 12-18 months; or the company's liquidity position worsens. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Chemicals published in October 2023. COMPANY PROFILE Headquartered in Switzerland, Arxada AG is a leading global specialty chemicals business serving five core end markets; human health and nutrition, home and personal care, paints and coatings, wood protection and industrials. The company's has an intellectual property portfolio of more than 150 active patent families. Arxada has a global manufacturing footprint with 24 sites across more than 100 countries and 14 research and development centres. In the twelve months, that ended December 31, 2023, the company generated sales of around CHF2 billion. ============= U K R A I N E ============= CITY OF DNIPRO: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' ------------------------------------------------------------------ Fitch Ratings has upgraded the Ukrainian City of Dnipro's Long-Term Foreign-Currency (LTFC) Issuer Default Ratings (IDR) to 'CCC' from 'CC'. Fitch has also affirmed the Long-Term Local-Currency (LTLC) IDR at 'CCC'. Ratings at this level typically do not carry Outlooks due to their high volatility. The upgrade is based on the evidenced financial resilience, despite significant financing needs and liquidity risks. The city still has little capacity to navigate the adverse economic conditions, reflected in the unchanged 'ccc' Standalone Credit Profile (SCP). Fitch expects an increase in the city's and city-guaranteed municipal companies' debt from international financial institutions (IFIs), but the probability of default, particularly over the next 12 months, remains low. Dnipro's LTFC IDR is insulated from Ukraine's recent downgrades, as its financial profile is sufficiently strong to withstand a sovereign default. Martial law has been in force in Ukraine since the Russian war began in February 2022. The war has led to significant legal changes affecting local and regional governments' (LRGs) finances, complicating financial planning. KEY RATING DRIVERS Risk Profile: 'Vulnerable' This assessment is in line with all Fitch-rated Ukrainian cities. It reflects Fitch's view that there is a very high risk of the issuer's ability to cover debt service with the operating balance weakening unexpectedly over the scenario horizon (2024-2025) due to lower revenue, higher expenditure, or an unexpected rise in liabilities or debt-service requirements. Revenue Robustness: 'Weaker' Tax revenue (82% of total revenue) and state transfers (13%) dominated Dnipro's revenue in 2023. Revenue remains unstable due to the weakening operating risk environment in Ukraine and despite a 69% growth in income tax revenue in 2021-2023. Fitch expects Dnipro's income tax revenue to decrease in 2024, in line with expectations for most rated Ukrainian cities. Financial stability might improve once the war ends and the central government continues with LRG reforms. Revenue Adjustability: 'Weaker' Dnipro has limited ability to generate additional revenue in response to an economic downturn. Income tax rates and current transfers are decided by the central government. Local tax revenues were 26% of city's total revenue in 2023, while taxes for which Dnipro has some limited rate-setting power provided around 21%. Economic conditions make it difficult for households to afford higher taxes. Although an equalisation scheme is in place for LRGs in Ukraine, Dnipro is a contributor to it as its personal income tax (PIT) revenue per capita was above 110% of national average, qualifying the city for payment of the reverse subsidy. Expenditure Sustainability: 'Weaker' Dnipro's main mandatory responsibilities (education, housing, utilities, social and health care), about 56% of total expenditure, are largely non-cyclical. High inflation (Fitch forecasts 6.1% in 2024 and 7.6% in 2025) exacerbates expenditure pressure, especially in a volatile framework affected by war damage and the costs of hosting internal refugees. Rising costs, including frequent minimum wage adjustments by the government, will strain the city's budget. Capex remains volatile due to the ongoing war, with significant infrastructure repair required and transfers to municipal companies. The city will likely need to rely on loans from IFIs and grants to finance its needs. Expenditure Adjustability: 'Weaker' Dnipro's ability to reduce spending is limited due to mandatory responsibilities and a volatile expenditure framework affected by war damage and inflation. Operating on a 'pay-as-you-go' basis makes long-term investments difficult. Capex represented 25% of totex in 2023, with 41% of capex being capital transfers. The city and its municipal companies face significant underfunding and high investment needs. Combined with already high contributions to the municipal companies, this may further strain the city's spending. Liabilities & Liquidity Robustness: 'Weaker' Ukrainian cities operate in a difficult debt and liquidity management framework due to an unpredictable domestic capital market and banking sector with sub-investment-grade counterparties. Access to international markets is limited, undermined by recent sovereign defaults. Cities need to rely on short- to medium-term floating interest rate loans and unhedged medium- to long-term foreign-currency debt from IFIs, exposing them to significant interest rate and currency risks. Additionally, municipal companies carry risky debt, including FX debt provided by IFIs, further contributing to financial instability. Liabilities & Liquidity Flexibility: 'Weaker' High counterparty risk and the limited effectiveness of emergency state liquidity, given the sovereign's sub-investment-grade ratings, drive this assessment. Liquidity challenges are worsened by reliance on domestic banks rated below 'BBB-'. Dnipro's cash position decreased to UAH388 million at end-2023, compared with UAH688 million at end-2021, primarily due to continued investments in 2022, which led to a decrease in cash. Cash might be depleted, as Fitch expects the city to resume investments. Financial Profile: 'b category' Fitch assesses Dnipro's financial profile in the 'b' category, despite favourable payback ratios around 0x-1.2x in 2021-2023. The assessment considers the war's detrimental impact on the national economy and infrastructure, which affects the city's short- and medium-term performance. The war introduces great uncertainty, including changes in PIT revenue generation and distribution, high inflation, and increased infrastructure investment needs. These factors collectively increase the risk of unfavourable economic developments, which may lead to increased borrowing needs and directly affect the city's debt servicing ability. Future debt repayments are a risk, and Fitch expects an increase in direct debt to finance investments. However, Fitch observes changes in the legal framework, in particular the easing of restrictions on foreign-currency debt servicing, leading to an improvement in the financial profile. The availability of liquidity lines and loans from IFIs further supports the city's financial position. ESG - Political Stability and Rights: Russia's invasion and subsequent ongoing full-scale war has severely compromised the city's political stability and the security outlook. The war has caused many deaths and extensive property damage, with the aim of changing the city's government and/or occupying its territory. ESG - Creditor Rights: The protracted war has weakened the city's ability to service and repay debt. However, Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing starts to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing Derivation Summary The combination of the city's unchanged 'Vulnerable' risk profile and improved, but remaining in the 'b' category, financial profile assessments indicate an SCP of 'b' or below. The 'ccc' SCP results from the application of the Lower Speculative Grade of Fitch's International Local and Regional Government Rating Criteria. Fitch qualitatively assesses the city's risk of default, and the remaining margin of safety based on overall performance and guided by rating definitions. The 'ccc' SCP indicates that default is still a real possibility and reflects significant refinancing needs and liquidity risk, even if an immediate or unavoidable default is not expected or the city has no current debt, and the city's limited ability to adverse economic conditions. Fitch does not see a risk of the city's inability to service its debt, particularly over the next 12 months. Due to Ukraine's 'RD' LTFC IDR, which resulted from the government's recent default on its Eurobonds, the sovereign rating cap is currently not applicable. Fitch believes that due to its sufficiently strong financial profile, the city could withstand a sovereign default, so its LTFC IDR is insulated from the recent sovereign downgrades. Fitch explained the rationale behind this in the Fitch Wire published on 20 August 2024 (Ukrainian City Ratings Are Not Directly Affected by Sovereign Default). There are no factors affecting the ratings other than the SCP, and the city's LTFC and LTLC IDRs are equal to its SCP. Short-Term Ratings The 'C' Short-Term IDR is the only possible option corresponding to the 'CCC' LT IDRs. National Ratings Dnipro's National Rating is 'AA(ukr)', the highest possible rating corresponding to the 'CCC' LTLC IDR. The city's diversified revenue base and existing spending flexibility, proven by significant spending cuts in 2022, show that, like other Ukrainian LRGs, it is in a stronger position than national peers from other asset classes, justifying the highest possible national rating for the given mapping. Key Assumptions Qualitative and quantitative assumptions: Risk Profile: 'Vulnerable, Unchanged with Low weight' Revenue Robustness: 'Weaker, Unchanged with Low weight' Revenue Adjustability: 'Weaker, Unchanged with Low weight' Expenditure Sustainability: 'Weaker, Unchanged with Low weight' Expenditure Adjustability: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low weight' Financial Profile: 'b, Improved with High weight' Asymmetric Risk: 'N/A, Unchanged with Low weight' Support (Budget Loans): 'N/A, Unchanged with Low weight' Support (Ad Hoc): 'N/A, Unchanged with Low weight' Rating Cap (LT IDR): 'N/A, Unchanged with Low weight' Rating Cap (LT LC IDR) 'N/A, Unchanged with Low weight' Rating Floor: 'N/A, Unchanged with Low weight' Quantitative assumptions - Issuer Specific Fitch's rating action is driven by the following assumptions for reference metrics under its 2024-2025 rating case scenario. These include their respective changes since the last review and weights in the rating decision: - Payback ratio: below 5.0x, unchanged with low weight - Actual coverage ratio: above 1.7x, unchanged with low weight - Fiscal debt burden: below 50%, unchanged with low weight Fitch's rating case typically follows a "through-the-cycle" scenario, incorporating a combination of revenue, cost, and financial risk stresses. Under normal circumstances, this would be based on historical figures from 2019-2023 and projected ratios for 2024-2028. However, the war has severely disrupted Ukraine's economy and the financial capacity of its LRGs, impairing even mid-term planning ability. This disruption has significantly constrained its ability to develop a reliable rating scenario due to high uncertainty and volatility. Consequently, Fitch is limited to projecting key assumptions for the scenario only for 2024-2025. The key assumptions for the scenario include: Annual average 2.6% decrease in operating revenue, driven mainly by tax revenue decrease (0.9%), which is boosted by regular increases in the minimum wage and an expected national economic rebound with real GDP growth of 3.2% in 2024 and 4.4% in 2025; Annual average 0.1% decrease in opex; rising inflation, expectations of salary growth pressures spending as well as higher transfers to the municipal companies; Annual net capex of UAH3.6 billion on average, which considers uncertainty about the timing and amount of available capital grants as well as debt financing; Average cost of debt of 7.1% in 2024-2025, excluding the interest-free loan from the government, and medium- to long-term maturities of new debt (minimum five years); no interest cost caps assumed; Municipal companies' debt only based on current knowledge about the debt financed investment plans. However, increase in debt very probable. Quantitative assumptions - Sovereign Related Figures as per Fitch's sovereign actual for 2023 and forecast for 2026, respectively (no weights and changes since the last review are included as none of these assumptions were material to the rating action): - GDP per capita (US dollar, market exchange rate): 5,014; 5,333 - Real GDP growth (%): 5.3; 5.0 - Consumer prices (annual average % change): 12.9; 5.8 - General government balance (% of GDP): -19.5; -12.7 - General government debt (% of GDP): 84.4; 103.0 - Current account balance plus net FDI (% of GDP): -2.8; -6.7 - Net external debt (% of GDP): -16.5; 15.1 - IMF Development Classification: EM (emerging market) - CDS Market Implied Rating: n/a Liquidity and Debt Structure Based on information provided by Dnipro, the city and its municipal companies are current on all financial commitments. Summary of Financial Adjustments To make data internationally comparable and compatible with its rating criteria, Fitch adjusted the city's financial data in particular when calculating adjusted debt: Fitch-adjusted debt includes the guaranteed debt of municipal companies, as in Fitch's view, it could crystallise as direct obligations under unfavourable economic conditions. Issuer Profile Dnipro is one of the largest cities in Ukraine with a population of about one million in January 2022 (last available public data). The city's economy was industrialised and dominated by metallurgy and heavy manufacturing sectors before the war started. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Increased risk of default due to weakened liquidity that could pressure the city's ability to service debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Overall financial stabilisation of the city, along with a reduced risk of liquidity stress and greater confidence in the domestic capital market, leading to enhanced financial stability and increased liquidity, could result in an upgrade. ESG Considerations Dnipro has an ESG Relevance Score of '5' for Political Stability and Rights due to the severe impact of the war with Russia, which as compromised the cities political stability and security outlook, negatively affecting their credit profiles and ratings. The war has resulted in many casualties and extensive property damage. Dnipro has an ESG Relevance Score of '4' for Creditor Rights due to due to improving, but still weakened ability to service and repay debt. The protracted war has weakened the city's ability to service and repay debt, however Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing start to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. 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. Discussion Note Committee Date: 15 October 2024 There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion. Entity/Debt Rating Prior ----------- ------ ----- Dnipro, City of LT IDR CCC Upgrade CC ST IDR C Affirmed C LC LT IDR CCC Affirmed CCC Natl LT AA(ukr)Affirmed AA(ukr) CITY OF KHARKOV: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' ------------------------------------------------------------------- Fitch Ratings has upgraded the Ukrainian City of Kharkov's Long-Term Foreign-Currency (LTFC) Issuer Default Ratings (IDR) to 'CCC' from 'CC'. Fitch has also affirmed the Long-Term Local-Currency (LTLC) IDR at 'CCC'. Ratings at this level typically do not carry Outlooks due to their high volatility. The upgrade is based on the evidenced financial resilience, despite significant financing needs and liquidity risks. The city still has little capacity to navigate the adverse economic conditions, justifying the unchanged 'ccc' Standalone Credit Profile (SCP). Fitch expects an increase in the city's and city-guaranteed municipal companies' debt from international financial institutions (IFIs), but the probability of default, particularly over the next 12 months, remains low. Kharkov's LTFC IDR is insulated from Ukraine's recent downgrades, as its financial profile is sufficiently strong to withstand a sovereign default. Martial law has been in force in Ukraine since the Russian war began in February 2022. The war has led to significant legal changes affecting local and regional governments' (LRGs) finances, complicating financial planning. KEY RATING DRIVERS Risk Profile: 'Vulnerable' This assessment is in line with all Fitch-rated Ukrainian cities. It reflects Fitch's view that there is a very high risk of the issuer's ability to cover debt service with the operating balance weakening unexpectedly over the scenario horizon (2024-2025) due to lower revenue, higher expenditure, or an unexpected rise in liabilities or debt-service requirements. Revenue Robustness: 'Weaker' Tax revenue (78% of total revenue) and state transfers (13%) dominated Kharkov's revenue in 2023. Revenue remains unstable due to the weakening operating risk environment in Ukraine and despite 16.5% growth in income tax revenue in 2021-2023. Kharkov has been the most affected by the war, resulting in the lowest growth in personal income tax (PIT) revenue. This is because many people have been relocated or moved to other regions of Ukraine. Fitch expects Kharkov's income tax revenue to decrease in 2024, in line with expectations for most rated Ukrainian cities. Financial stability might improve once the war ends and the central government continues with LRG reforms. Revenue Adjustability: 'Weaker' Kharkov has limited ability to generate additional revenue in response to an economic downturn. Income tax rates and current transfers are decided by the central government. Local tax revenues were at 28% of city's total revenue in 2023, while taxes over which Kharkov has some limited rate setting power provided around 23%. Economic conditions make it difficult for households to afford higher taxes. Although an equalisation scheme is in place for LRGs in Ukraine, Kharkov did not benefit or contributed to it in 2023 as its PIT revenue per capita was within the range that means it did not qualify. Expenditure Sustainability: 'Weaker' The city's main mandatory responsibilities (education, housing, utilities, social and health care), about 58% of total expenditure, are largely non-cyclical. High inflation (Fitch forecast 6.1% in 2024 and 7.6% in 2025) exacerbates expenditure pressure, especially in a volatile framework affected by war damage and the costs of hosting internal refugees. Rising costs, including frequent minimum wage adjustments by the government, will strain the city's budget. Capex remains volatile due to the ongoing war, with significant infrastructure repair required and transfers to municipal companies. The city will likely need to rely on loans from IFIs and grants to finance its needs. Expenditure Adjustability: 'Weaker' Kharkov's ability to reduce spending is limited due to mandatory responsibilities and a volatile expenditure framework affected by war damage and inflation. Operating on a 'pay-as-you-go' basis makes long-term investments difficult. Capex represented 19% of totex in 2023, with 70% of capex capital transfers. The city and its municipal companies face significant underfunding and high investment needs. Combined with already high contributions to the municipal companies, this may further strain the city's spending. Liabilities & Liquidity Robustness: 'Weaker' Ukrainian cities operate in difficult debt and liquidity management framework due to an unpredictable domestic capital market and a banking sector with sub-investment-grade counterparties. Access to international markets is limited, undermined by recent sovereign defaults. Cities need to rely on short- to medium-term floating interest rate loans and unhedged medium- to long-term foreign-currency debt from IFIs, exposing them to significant interest rate and currency risks. Additionally, municipal companies carry risky debt, including FX debt provided by IFIs, further contributing to financial instability. Liabilities & Liquidity Flexibility: 'Weaker' High counterparty risk and limited effectiveness of emergency state liquidity, given the sovereign's sub-investment-grade ratings, drive the assessment. Liquidity challenges are worsened by reliance on domestic banks rated below 'BBB-'. Kharkov's cash position improved to UAH 0.6 billion at end-2023, compared with end-2021, which mainly resulted from suspended investments in 2022, which led to cash accumulation. Cash might be depleted, as Fitch expects the city to resume investments. Financial Profile: 'b category' Fitch assesses Kharkov's financial profile in the 'b' category, despite favourable payback ratios around 0x-1x in 2021-2023. This assessment considers the war's detrimental impact on the national economy and infrastructure, which affects the city's short and medium-term performance. The war introduces great uncertainty, including changes in PIT revenue generation and distribution, high inflation, and increased infrastructure investment needs. These factors collectively increase the risk of unfavourable economic developments, which may lead to increased borrowing needs and directly affect the city's debt servicing ability. Future debt repayments are a risk, and Fitch expects an increase in direct debt to finance investments. However, Fitch observes changes in the legal framework, in particular the easing of restrictions on foreign-currency debt servicing, leading to an improvement in the financial profile. The availability of liquidity lines and loans from IFIs further supports the city's financial position. ESG - Political Stability and Rights: Russia's invasion and subsequent ongoing full-scale war has severely compromised the city's political stability and the security outlook. The war has caused many deaths and extensive property damage, with the aim of changing the city's government and/or occupying its territory. ESG - Creditor Rights: The protracted war has weakened the city's ability to service and repay debt. However, Fitch observes some improvement in the legal framework easing restrictions to service foreign-currency debt. IFIs' financing starts to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing Derivation Summary The combination of city's unchanged 'Vulnerable' risk profile and improved, but remaining in the 'b' category, financial profile indicate an SCP of 'b' or below. The 'ccc' SCP results from the application of the Lower Speculative Grade of Fitch's International Local and Regional Government Rating Criteria. Fitch qualitatively assesses the city's risk of default, and the remaining margin of safety based on overall performance and guided by rating definitions. The 'ccc' SCP indicates that default is still a real possibility and reflects significant refinancing needs and liquidity risk, even if an immediate or unavoidable default is not expected or the city has no current debt, and the city's limited ability to weather adverse economic conditions. Fitch does not see a risk of the city's inability to service its debt, particularly over the next 12 months. Due to Ukraine's 'RD' LTFC IDR, which resulted from the government's recent default on its Eurobonds, the sovereign rating cap is currently not applicable. Fitch believes that due to its sufficiently strong financial profile, the city could withstand a sovereign default, so its LTFC IDR is insulated from the recent sovereign downgrades. Fitch explained the rationale behind this in the Fitch Wire published on 20 August 2024 (Ukrainian City Ratings Are Not Directly Affected by Sovereign Default). There are no other factors affecting the ratings other than the SCP, and the city's LTFC and LTLC IDRs are equal to its SCP. Short-Term Ratings The 'C' Short-Term IDR is the only possible option corresponding to the LT IDRs of 'CCC'. National Ratings Kharkov's National Rating is 'AA(ukr)', the highest possible rating corresponding to the 'CCC' LTLC IDR. The city's diversified revenue base and existing spending flexibility, proven by significant spending cuts in 2022, show that, like other Ukrainian LRGs, it is in a stronger position than national peers from other asset classes, justifying the highest possible National Rating for the given mapping. Key Assumptions Risk Profile: 'Vulnerable, Unchanged with Low weight' Revenue Robustness: 'Weaker, Unchanged with Low weight' Revenue Adjustability: 'Weaker, Unchanged with Low weight' Expenditure Sustainability: 'Weaker, Unchanged with Low weight' Expenditure Adjustability: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low weight' Financial Profile: 'b, Improved with High weight' Asymmetric Risk: 'N/A, Unchanged with Low weight' Support (Budget Loans): 'N/A, Unchanged with Low weight' Support (Ad Hoc): 'N/A, Unchanged with Low weight' Rating Cap (LT IDR): 'N/A, Unchanged with Low weight' Rating Cap (LT LC IDR) 'N/A, Unchanged with Low weight' Rating Floor: 'N/A, Unchanged with Low weight' Quantitative assumptions - Issuer Specific Fitch's rating action is driven by the following assumptions for reference metrics under its 2024-2025 rating case scenario. These include their respective changes since the last review and weights in the rating decision: - Payback ratio: below 5.0x, unchanged with low weight - Actual coverage ratio: above 1.7x, unchanged with low weight - Fiscal debt burden: below 50%, unchanged with low weight Fitch's rating case typically follows a "through-the-cycle" scenario, incorporating a combination of revenue, cost, and financial risk stresses. Under normal circumstances, this would be based on historical figures from 2019-2023 and projected ratios for 2024-2028. However, the war has severely disrupted Ukraine's economy and the financial capacity of its LRGs, impairing even mid-term planning ability. This disruption has significantly constrained its ability to develop a reliable rating scenario due to high uncertainty and volatility. Consequently, Fitch is limited to projecting key assumptions for the scenario only for 2024-2025. The key assumptions for the scenario include: Annual average 10.5% increase in operating revenue, driven mainly by tax revenue growth (5.6%), which are boosted by regular increases in the minimum wage and an expected national economic rebound with real GDP growth of 3.2% in 2024 and 4.4% in 2025; Annual average 10.7% increase in opex; raising inflation, expectations of salary growth pressures spending as well as higher transfers to municipal companies; Annual net capex of UAH3.2 billion on average, which considers uncertainty about the timing and amount of available capital grants as well as debt financing; Average cost of debt of 4.8% in 2024-2025, excluding the interest-free loan from the government, and medium- to long-term maturities of new debt (minimum five years); no interest costs caps assumed; Municipal companies' debt only based on current knowledge about the debt financed investment plans. However, increase in debt very probable. Quantitative assumptions - Sovereign Related Figures as per Fitch's sovereign actual for 2023 and forecast for 2026, respectively (no weights and changes since the last review are included as none of these assumptions were material to the rating action): - GDP per capita (US dollar, market exchange rate): 5,014; 5,333 - Real GDP growth (%): 5.3; 5.0 - Consumer prices (annual average % change): 12.9; 5.8 - General government balance (% of GDP): -19.5; -12.7 - General government debt (% of GDP): 84.4; 103.0 - Current account balance plus net FDI (% of GDP): -2.8; -6.7 - Net external debt (% of GDP): -16.5; 15.1 - IMF Development Classification: EM (emerging market) - CDS Market Implied Rating: n/a Liquidity and Debt Structure Kharkov has fully repaid its financial commitments, with the exception of the loan from the government, which is interest-free and should be eventually written off. Summary of Financial Adjustments To make data internationally comparable and compatible with its rating criteria, Fitch adjusted the city's financial data in particular when calculating adjusted debt: Fitch-adjusted debt includes the guaranteed debt of municipal companies as, in Fitch's view, it could crystallise as a direct obligations under unfavourable economic conditions. Issuer Profile Kharkov is the capital of Kharkov region and had a population of about 1.5 million of January 2022 (last available public data). It had a diversified urban economy supported by a large number of companies in various sectors before the war started. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Increased risk of default due to weakened liquidity that could pressure the city's ability to service debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Overall financial stabilisation of the city, along with a reduced risk of liquidity stress and greater confidence in the domestic capital market, leading to enhanced financial stability and increased liquidity, could result in an upgrade. ESG Considerations Kharkov has an ESG Relevance Score of '5' for Political Stability and Rights due to the severe impact of the war with Russia, which as compromised the cities political stability and security outlook, negatively affecting their credit profiles and ratings. The war has resulted in many casualties and extensive property damage. Kharkov has an ESG Relevance Score of '4' for Creditor Rights due to due to improving, but still weakened ability to service and repay debt. The protracted war has weakened the city's ability to service and repay debt, however Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing start to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. 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. Discussion Note Committee Date: 15 October 2024 There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion. Entity/Debt Rating Prior ----------- ------ ----- Kharkov, City of LT IDR CCC Upgrade CC ST IDR C Affirmed C LC LT IDR CCC Affirmed CCC Natl LT AA(ukr) Affirmed AA(ukr) CITY OF KRYVYI RIH: Fitch Hikes LT Foreign Currency IDR to 'CCC' ---------------------------------------------------------------- Fitch Ratings has upgraded the Ukrainian City of Kryvyi Rih's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'CCC' from 'CC'. Fitch has also affirmed the Long-Term Local-Currency (LTLC) IDR at 'CCC'. Ratings at this level typically do not carry Outlooks due to their high volatility. The upgrade is based on the evidenced financial resilience, despite significant financing needs and liquidity risks. The city still has little capacity to navigate the adverse economic conditions reflected in the unchanged 'ccc' Standalone Credit Profile (SCP). Fitch expects an increase in the city's and city-guaranteed municipal companies' debt from international financial institutions (IFIs), but the probability of default, particularly over the next 12 months, remains low. Kryvyi Rih's LTFC IDR is insulated from Ukraine's recent downgrades, as its financial profile is sufficiently strong to withstand a sovereign default. Martial law has been in force in Ukraine since the Russian war began in February 2022. The war has led to significant legal changes affecting local and regional governments' (LRGs) finances, complicating financial planning. KEY RATING DRIVERS Risk Profile: 'Vulnerable' This assessment reflects Fitch's view of very high risk relative to international peers that the issuer may see its ability to cover debt service by the operating balance weaken unexpectedly over the forecast horizon either because of lower-than-expected revenue or expenditure overshooting expectations, or because of an unanticipated rise in liabilities or debt-service requirements. Revenue Robustness: 'Weaker' Tax revenue (81% of total revenue) and state transfers (15%) dominated Kryvyi Rih's revenue in 2023. Revenue remains unstable due to the weakening operating risk environment in Ukraine and despite 22% growth in income tax revenue in 2021-2022. Fitch expects Kryvyi Rih's income tax revenue to decrease further in 2024 (as in 2023), in line with expectations for most of the rated Ukrainian cities. Financial stability might improve once the war ends and the central government continues with LRG reforms. Revenue Adjustability: 'Weaker' Kryvyi Rih has limited ability to generate additional revenue in response to an economic downturn. Income tax rates and current transfers are decided by the central government. Local tax revenues were 39% of total revenue in 2023, while taxes for which the city has limited rate-setting power provided around 33%. Economic conditions make it difficult for households to afford higher taxes. Although an equalisation scheme is in place for LRGs in Ukraine, Kryvyi Rih was a contributor to it as its personal income tax (PIT) revenue per capita was above 110% of national average, meaning it qualified for payment of the reverse subsidy (UAH367.9 million in 2023). Expenditure Sustainability: 'Weaker' The city's main mandatory responsibilities (education, housing, utilities, social and health care), about 51% of total expenditure, are largely non-cyclical. High inflation (Fitch forecast 6.1% in 2024 and 7.6% in 2025) exacerbates expenditure pressure, especially in a volatile framework affected by war damage and the costs of hosting internal refugees. Rising costs, including frequent minimum wage adjustments by the government, will strain the city's budget. Capex remains volatile due to the ongoing war, with significant infrastructure repair required and transfers to municipal companies. The city will likely need to rely on loans from IFIs and grants to finance its needs. Expenditure Adjustability: 'Weaker' Kryvyi Rih's ability to reduce spending is limited due to mandatory responsibilities and a volatile expenditure framework affected by war damage and inflation. Operating on a 'pay-as-you-go' basis makes long-term investments difficult. Capex represented low 13.9% of totex in 2023, with 37% of capex transfers to municipal companies. The city and its municipal companies face significant underfunding and high investment needs. Combined with already high contributions to the municipal companies, this may further strain the city's spending. Liabilities & Liquidity Robustness: 'Weaker' Ukrainian cities operate in a difficult debt and liquidity management framework due to an unpredictable domestic capital market and a banking sector with sub-investment grade counterparties. Access to international markets is limited, undermined by recent sovereign defaults. Cities need to rely on short- to medium-term floating interest rate loans and unhedged medium- to long-term foreign-currency debt from IFIs, exposing them to significant interest rate and currency risks. Additionally, municipal companies carry risky debt, including FX debt provided by IFIs, further contributing to financial instability. Liabilities & Liquidity Flexibility: 'Weaker' High counterparty risk and limited effectiveness of emergency state liquidity, given the sovereign's sub-investment-grade ratings, drive this assessment. Liquidity challenges are worsened by reliance on domestic banks rated below 'BBB-'. Kryvyi Rih's cash position improved to UAH937.4 million at end-2023, compared with UAH417.8 million at end-2021, but this results mainly from suspended investments in 2022, which led to cash accumulation. Cash might be depleted, as Fitch expects the city to resume investments. Financial Profile: 'b category' Fitch assesses Kryvyi Rih's financial profile as weak, despite the city's lack of direct debt in 2021-2023. This considers the war's detrimental impact on the national economy and infrastructure, which affects the city's short- and medium-term performance. The war introduces great uncertainty, including changes in PIT revenue generation and distribution, high inflation, and increased infrastructure investment needs. These factors collectively increase the risk of unfavourable economic developments, which may lead to increased borrowing needs and directly affect the city's debt servicing ability. Future debt repayments are a risk, and Fitch expects an increase in direct debt to finance investments. However, Fitch observes changes in the legal framework, in particular the easing of restrictions on foreign-currency debt servicing, leading to an improvement in the financial profile. The availability of liquidity lines and loans from IFIs further supports the city's financial position. ESG - Political Stability and Rights: Russia's invasion and subsequent ongoing full-scale war has severely compromised the city's political stability and the security outlook. The war has caused many deaths and extensive property damage, with the aim of changing the city's government and/or occupying its territory. ESG - Creditor Rights: The protracted war has weakened the city's ability to service and repay debt. However, Fitch observes some improvement in the legal framework easing restrictions to service foreign-currency debt. IFIs' financing has also started to resume, in the form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. Derivation Summary The combination of city's unchanged 'Vulnerable' risk profile and improved, but remaining in the 'b' category, financial profile assessments indicate an SCP of 'b' or below. The 'ccc' SCP results from the application of the Lower Speculative Grade of Fitch's International Local and Regional Government Rating Criteria. Fitch qualitatively assesses the city's risk of default, and the remaining margin of safety based on overall performance and guided by rating definitions. The 'ccc' SCP indicates that default is still a real possibility and reflects significant refinancing needs and liquidity risk, even if an immediate or unavoidable default is not expected or the city has no current debt, and the city's limited ability to weather adverse economic conditions. Fitch does not see a risk of the city's inability to service its debt, particularly over the next 12 months. Due to Ukraine's 'RD' LTFC IDR, which resulted from the government's recent default on its Eurobonds, the sovereign rating cap is currently not applicable. Fitch believes that due to its sufficiently strong financial profile the city can withstand a sovereign default, so its LTFC IDR is insulated from the recent sovereign downgrades. Fitch explained the rationale behind this in the Fitch Wire published on 20 August 2024 (Ukrainian City Ratings Are Not Directly Affected by Sovereign Default). There are no factors affecting the ratings other than the SCP, and the city's LTFC and LTLC IDRs are equal to its SCP. Short-Term Ratings The 'C' Short-Term IDR is the only possible option corresponding to the LT IDRs of 'CCC'. National Ratings Kryvyi Rih's 'AA(ukr)' National Rating is the highest possible rating corresponding to the 'CCC' LTLC IDR. The city's diversified revenue base and existing spending flexibility, proven by significant spending cuts in 2022, show that like other Ukrainian LRGs, it is in a stronger position than national peers from other asset classes, justifying the highest possible national rating for the given mapping. Key Assumptions Qualitative and quantitative assumptions: Risk Profile: 'Vulnerable, Unchanged with Low weight' Revenue Robustness: 'Weaker, Unchanged with Low weight' Revenue Adjustability: 'Weaker, Unchanged with Low weight' Expenditure Sustainability: 'Weaker, Unchanged with Low weight' Expenditure Adjustability: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low weight' Financial Profile: 'b, Improved with High weight' Asymmetric Risk: 'N/A, Unchanged with Low weight' Support (Budget Loans): 'N/A, Unchanged with Low weight' Support (Ad Hoc): 'N/A, Unchanged with Low weight' Rating Cap (LT IDR): 'N/A, Unchanged with Low weight' Rating Cap (LT LC IDR) 'N/A, Unchanged with Low weight' Rating Floor: 'N/A, Unchanged with Low weight' Quantitative assumptions - Issuer Specific Fitch's rating action is driven by the following assumptions for reference metrics under its 2024-2025 rating case scenario. These include their respective changes since the last review and weights in the rating decision: - Payback ratio: below 5.0x, unchanged with low weight - Actual coverage ratio: above 1.7x, unchanged with low weight - Fiscal debt burden: below 50%, unchanged with low weight Fitch's rating case typically follows a "through-the-cycle" scenario, incorporating a combination of revenue, cost, and financial risk stresses. Under normal circumstances, this would be based on historical figures from 2019-2023 and projected ratios for 2024-2028. However, the war has severely disrupted Ukraine's economy and the financial capacity of its LRGs, impairing even mid-term planning ability. This disruption has significantly constrained its ability to develop a reliable rating scenario due to high uncertainty and volatility. Consequently, Fitch is limited to projecting key assumptions for the scenario only for 2024-2025. The key assumptions for the scenario include: - Annual average 2.8% increase in operating revenue, driven mainly by tax revenue growth (4.3%), which is boosted by regular increases in the minimum wage and an expected national economic rebound with real GDP growth of 3.2% in 2024 and 4.4% in 2025; - Annual average 4.2% increase in operating spending; raising inflation, expectations of salary growth pressures spending as well as higher transfers to the municipal companies; - Annual net capex of UAH1.7 billion on average; considers uncertainty about the timing and amount of available capital grants as well as debt financing; - Average cost of debt of 5.9% in 2024-2025, excluding the interest-free loan from the government, and medium- to long-term maturities of new debt (minimum five years); no interest costs caps assumed; - Municipal companies' debt only based on current knowledge about the debt financed investment plans. However, an increase in debt very probable. Quantitative assumptions - Sovereign Related Figures as per Fitch's sovereign actual for 2023 and forecast for 2026, respectively (no weights and changes since the last review are included as none of these assumptions were material to the rating action): - GDP per capita (US dollar, market exchange rate): 5,014; 5,333 - Real GDP growth (%): 5.3; 5.0 - Consumer prices (annual average % change): 12.9; 5.8 - General government balance (% of GDP): -19.5; -12.7 - General government debt (% of GDP): 84.4; 103.0 - Current account balance plus net FDI (% of GDP): -2.8; -6.7 - Net external debt (% of GDP): -16.5; 15.1 - IMF Development Classification: EM (emerging market) - CDS Market Implied Rating: n/a Liquidity and Debt Structure Based on the information provided by Kryvyi Rih, the city and its municipal companies are current on all financial commitments, including the liabilities that will fall due in October 2024. Summary of Financial Adjustments To make data internationally comparable and compatible with its rating criteria, Fitch adjusted the city's financial data, in particular when calculating operating balance and adjusted debt: Fitch-operating balance includes the state subsidy (2021: UAH1,147.8 million) directed through the city's budget but aimed at debt settlement of the heat and water supply companies as operating revenue, despite its allocation to the special fund, due to its operating purpose related to tariff adjustments. Fitch-adjusted debt includes the guaranteed debt of municipal companies as, in Fitch's view, it could crystallise as direct obligations under unfavourable economic conditions. Issuer Profile Kryvyi Rih is an industrial city in central Ukraine with a population of about 603,900 as of January 2022. The average salary was UAH13,669 (Ukraine: UAH14,014). The unemployment rate was 9.1% (Ukraine: 10.3%). The city's economy is heavily dominated by the iron ore mining and steel production industries. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Increased risk of default due to weakened liquidity that could pressure the city's ability to service debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Overall financial stabilisation of the city, along with a reduced risk of liquidity stress and greater confidence in the domestic capital market, leading to enhanced financial stability and increased liquidity, could result in an upgrade. ESG Considerations Kryvyi Rih, City of has an ESG Relevance Score of '5' for Political Stability and Rights due to the severe impact of the war with Russia, which as compromised the cities political stability and security outlook, negatively affecting their credit profiles and ratings. The war has resulted in many casualties and extensive property damage. Kryvyi Rih, City of has an ESG Relevance Score of '4' for Creditor Rights due to improving, but still weakened ability to service and repay debt. The protracted war has weakened the city's ability to service and repay debt, however Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing start to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. 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. Discussion Note Committee Date: 15 October 2024 There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion. Entity/Debt Rating Prior ----------- ------ ----- Kryvyi Rih, City of LT IDR CCC Upgrade CC ST IDR C Affirmed C LC LT IDR CCC Affirmed CCC Natl LT AA(ukr)Affirmed AA(ukr) CITY OF KYIV: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' ---------------------------------------------------------------- Fitch Ratings has upgraded the Ukrainian City of Kyiv's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'CCC' from 'CC'. Fitch has also affirmed the Long-Term Local-Currency (LTLC) IDR at 'CCC'. Ratings at this level typically do not carry Outlooks due to their high volatility. The upgrade is based on the evidenced financial resilience, despite significant financing needs and liquidity risks. The city still has little capacity to navigate the adverse economic conditions, reflected in the unchanged 'ccc' Standalone Credit Profile (SCP). Fitch expects an increase in the city's and city-guaranteed municipal companies' debt from international financial institutions (IFIs), but the probability of default, particularly over the next 12 months, remains low. Kyiv's LTFC IDR is insulated from Ukraine's recent downgrades, as its financial profile is sufficiently strong to withstand a sovereign default. Martial law has been in force in Ukraine since the Russian war began in February 2022. The war has led to significant legal changes affecting local and regional governments' (LRGs) finances, complicating financial planning. KEY RATING DRIVERS Risk Profile: 'Vulnerable' This assessment is in line with all Fitch-rated Ukrainian cities. The assessment reflects Fitch's view that there is a very high risk of the issuer's ability to cover debt service with the operating balance weakening unexpectedly over the scenario horizon (2024-2025) due to lower revenue, higher expenditure, or an unexpected rise in liabilities or debt-service requirements. Revenue Robustness: 'Weaker' Tax revenue (85% of total revenue) and state transfers (8%) dominated Kyiv's revenue in 2023. As the capital, the city has a different revenue structure and shows stronger results, relying more on taxes than other rated Ukrainian cities. Revenue remains unstable due to the weakening operating risk environment in Ukraine and despite a 26% growth in income tax revenue in 2021-2023. Financial stability might improve once the war ends and the central government continues with LRG reforms. Revenue Adjustability: 'Weaker' Kyiv has limited ability to generate additional revenue in response to an economic downturn. Income tax rates and current transfers are decided by the central government. The city's local tax revenues remained stable at 28% of total revenue from 2021 to 2023, but economic conditions make it difficult for households to afford higher taxes. In 2024, Fitch expects Kyiv's income tax revenue to grow, unlike the expected decline in income tax revenue for other rated Ukrainian cities. Kyiv is excluded from the equalisation scheme in place for LRGs, but benefits from special income tax distributions and road maintenance subsidies. Expenditure Sustainability: 'Weaker' Kyiv's main mandatory responsibilities (education, housing, utilities, social and health care), about 50% of total expenditure in 2023, are largely non-cyclical. High inflation (Fitch forecast 6.1% in 2024 and 7.6% in 2025) exacerbates expenditure pressure, especially in a volatile framework affected by war damage and the costs of hosting internal refugees. Rising costs, including frequent minimum wage adjustments by the government, will strain the city's budget. Capex remains volatile due to the ongoing war, with significant infrastructure repair required and transfers to municipal companies. The city will likely need to rely on loans from IFIs and grants to finance its needs. Expenditure Adjustability: 'Weaker' Kyiv's ability to reduce spending is limited due to mandatory responsibilities and a volatile expenditure framework affected by war damage and inflation. Operating on a 'pay-as-you-go' basis makes long-term investments difficult. Capex represented 33% of totex in 2023, with 62% of capex transfers to municipal companies. The city and its municipal companies face significant underfunding and high investment needs. Combined with already high contributions to municipal companies, this may further strain the city's spending. Liabilities & Liquidity Robustness: 'Weaker' Ukrainian cities operate in a difficult debt and liquidity management framework due to an unpredictable domestic capital market and a banking sector with sub-investment-grade counterparties. Access to international markets is limited, undermined by recent sovereign defaults. Cities need to rely on short- to medium-term floating interest rate loans and unhedged medium- to long-term foreign-currency debt from IFIs, exposing them to significant interest rate and currency risks. Additionally, municipal companies carry risky debt, including FX debt provided by IFIs, further contributing to financial instability. Liabilities & Liquidity Flexibility: 'Weaker' High counterparty risk and limited effectiveness of emergency state liquidity, given the sovereign's sub-investment-grade ratings, drive this assessment. Liquidity challenges are worsened by reliance on domestic banks rated below 'BBB-'. Kyiv's cash position improved to UAH8.7 billion at end-2023, compared with UAH5.9 billion at end-2021, but this mainly results from the suspended investments in 2022, which led to cash accumulation. Cash might be depleted, as Fitch expects the city to resume investments. Financial Profile: 'b category' Fitch assesses Kyiv's financial profile in the 'b' category, despite favourable payback ratios close to 0x in 2021-2023. This assessment considers the war's detrimental impact on the national economy and infrastructure, which affects the city's short and medium-term performance. The war introduces great uncertainty, including changes in PIT revenue generation and distribution, high inflation, and increased infrastructure investment needs. These factors collectively increase the risk of unfavourable economic developments, which may lead to increased borrowing needs and directly affect the city's debt servicing ability. Future debt repayments are a risk, and Fitch expects increase in direct debt to finance investments. However, Fitch observes changes in the legal framework, in particular the easing of restrictions on foreign-currency debt servicing, leading to an improvement in the financial profile. The availability of liquidity lines and loans from IFIs further supports the city's financial position. ESG - Political Stability and Rights: Russia's invasion and subsequent ongoing full-scale war has severely compromised the city's political stability and the security outlook. The war has caused many deaths and extensive property damage, with the aim of changing the city's government and/or occupying its territory. ESG - Creditor Rights: The protracted war has weakened the city's ability to service and repay debt. However, Fitch observes some improvement in the legal framework easing restrictions to service foreign-currency debt. IFIs' financing has also started to resume, in the form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. Derivation Summary The combination of the unchanged 'Vulnerable' risk profile and improved, but remaining in 'b' category, financial profile assessments indicate an SCP of 'b' or below. The 'ccc' SCP results from the application of the Lower Speculative Grade of Fitch's International Local and Regional Government Rating Criteria. Fitch qualitatively assesses the city's risk of default, and the remaining margin of safety based on overall performance and guided by rating definitions. The 'ccc' SCP indicates that default is still a real possibility and reflects significant refinancing needs and liquidity risk, even if an immediate or unavoidable default is not expected or the city has no current debt, and the city's limited ability to adverse weather economic conditions. Fitch does not see a risk of the city's inability to service its debt, particularly over the next 12 months. Due to Ukraine's 'RD' LTFC IDR, which resulted from the government's recent default on its Eurobonds, the sovereign rating cap is currently not applicable. Fitch believes that due to its sufficiently strong financial profile the city can withstand a sovereign default, so its LTFC IDR is insulated from the recent sovereign downgrades. Fitch explained the rationale behind this in the Fitch Wire published on 20 August 2024 (Ukrainian City Ratings Are Not Directly Affected by Sovereign Default). There are no factors affecting the ratings other than the SCP, and the city's LTFC and LTLC IDRs are equal to its SCP. Short-Term Ratings The 'C' ST IDR is the only possible option corresponding to the LT IDRs of 'CCC'. National Ratings Kyiv's 'AA(ukr)' National Rating is the highest possible rating corresponding to the 'CCC' LTLC IDR. The city's diversified revenue base and existing spending flexibility, proven by significant spending cuts in 2022, show that, like other Ukrainian LRGs, it is in a stronger position than national peers from other asset classes, justifying the highest possible national rating for the given mapping. Debt Ratings The ratings of Kyiv's domestic bonds are aligned with the city's Long-Term IDRs. This is because Fitch views the domestic bonds as direct, unconditional senior unsecured obligations of the city, ranking pari passu with all of its other present and future unsecured and unsubordinated obligations. Key Assumptions Qualitative and quantitative assumptions: Risk Profile: 'Vulnerable, Unchanged with Low weight' Revenue Robustness: 'Weaker, Unchanged with Low weight' Revenue Adjustability: 'Weaker, Unchanged with Low weight' Expenditure Sustainability: 'Weaker, Unchanged with Low weight' Expenditure Adjustability: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low weight' Financial Profile: 'b, Improved with High weight' Asymmetric Risk: 'N/A, Unchanged with Low weight' Support (Budget Loans): 'N/A, Unchanged with Low weight' Support (Ad Hoc): 'N/A, Unchanged with Low weight' Rating Cap (LT IDR): 'N/A, Unchanged with Low weight' Rating Cap (LT LC IDR) 'N/A, Unchanged with Low weight' Rating Floor: 'N/A, Unchanged with Low weight' Quantitative assumptions - Issuer Specific Fitch's rating action is driven by the following assumptions for reference metrics under its 2024-2025 rating case scenario. These include their respective changes since the last review and weights in the rating decision: - Payback ratio: below 5.0x, unchanged with low weight - Actual coverage ratio: above 1.7x, unchanged with low weight - Fiscal debt burden: below 50%, unchanged with low weight Fitch's rating case typically follows a "through-the-cycle" scenario, incorporating a combination of revenue, cost, and financial risk stresses. Under normal circumstances, this would be based on historical figures from 2019-2023 and projected ratios for 2024-2028. However, the war has severely disrupted Ukraine's economy and the financial capacity of its LRGs, impairing even the mid-term planning ability. This disruption has significantly constrained its ability to develop a reliable rating scenario due to high uncertainty and volatility. Consequently, Fitch is limited to projecting key assumptions for the scenario only for 2024-2025. The key assumptions for the scenario include: - Annual average 12.9% increase in operating revenue, mainly driven by tax revenue growth (14.1%), which is boosted by regular increases in the minimum wage and an expected national economic rebound with real GDP growth of 3.2% in 2024 and 4.4% in 2025; - Annual average 6.6% increase in opex; rising inflation, expectations of salary growth pressures spending as well as higher transfers to the municipal companies; - Annual net capex of UAH35.7 billion on average; considers uncertainty about the timing and amount of available capital grants as well as debt financing; - Average cost of debt of 3.7% in 2024-2025, excluding the interest-free loan from the government, and medium- to long-term maturities of new debt (minimum five years); no interest costs caps assumed; - Municipal companies' debt only based on current knowledge about the debt financed investment plans. However, increase in debt very probable. Quantitative assumptions - Sovereign Related Figures as per Fitch's sovereign actual for 2023 and forecast for 2026, respectively (no weights and changes since the last review are included as none of these assumptions were material to the rating action): - GDP per capita (US dollar, market exchange rate): 5,014; 5,333 - Real GDP growth (%): 5.3; 5.0 - Consumer prices (annual average % change): 12.9; 5.8 - General government balance (% of GDP): -19.5; -12.7 - General government debt (% of GDP): 84.4; 103.0 - Current account balance plus net FDI (% of GDP): -2.8; -6.7 - Net external debt (% of GDP): -16.5; 15.1 - IMF Development Classification: EM (emerging market) - CDS Market Implied Rating: n/a Liquidity and Debt Structure The city has confirmed that it is current on debt servicing. In September 2024 it redeemed UAH300 million of domestic bonds, series M. Summary of Financial Adjustments To make data internationally comparable and compatible with its rating criteria, Fitch adjusted the city's financial data, in particular when calculating operating balance and adjusted debt: Fitch-operating balance includes the state subsidy (2021: UAH987.8 million) directed through the city's budget but aimed at debt settlement of the heat and water supply companies as operating revenue, despite its allocation to the special fund, due to its operating purpose related to tariff adjustments. Fitch-adjusted debt includes the guaranteed debt of municipal companies as, in Fitch's view, it could crystallise as direct obligations under unfavourable economic conditions. Issuer Profile Kyiv is the capital and largest city of Ukraine with a population of approximately 2,952,300 as of January 2022. The average salary was UAH20,558 (Ukraine: UAH14,014). Kyiv's economy is diverse, with strong sectors in finance, IT, manufacturing, and international trade. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Increased risk of default due to weakened liquidity that could pressure the city's ability to service debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Overall financial stabilisation of the city, along with a reduced risk of liquidity stress and greater confidence in the domestic capital market, leading to enhanced financial stability and increased liquidity, could result in an upgrade. ESG Considerations Kyiv, City of has an ESG Relevance Score of '5' for Political Stability and Rights due to the severe impact of the war with Russia, which as compromised the cities political stability and security outlook, negatively affecting their credit profiles and ratings. The war has resulted in many casualties and extensive property damage. Kyiv, City of has an ESG Relevance Score of '4' for Creditor Rights due to improving, but still weakened ability to service and repay debt. The protracted war has weakened the city's ability to service and repay debt, however Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing start to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. 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. Discussion Note Committee date: 15 October 2024 There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion. Entity/Debt Rating Prior ----------- ------ ----- Kyiv, City of LT IDR CCC Upgrade CC ST IDR C Affirmed C LC LT IDR CCC Affirmed CCC Natl LT AA(ukr)Affirmed AA(ukr) senior unsecured LT CCC Affirmed CCC CITY OF LVIV: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' ---------------------------------------------------------------- Fitch Ratings has upgraded the Ukrainian City of Lviv's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'CCC' from 'CC'. Fitch has also affirmed the Long-Term Local-Currency (LTLC) IDR at 'CCC'. Ratings at this level typically do not carry Outlooks due to their high volatility. The upgrade is based on the evidenced financial resilience, despite significant financing needs and liquidity risks. The city still has little capacity to navigate the adverse economic conditions, reflected in the unchanged 'ccc' Standalone Credit Profile (SCP). Fitch expects an increase in the city's and city-guaranteed municipal companies' debt from international financial institutions (IFIs), but the probability of default, particularly over the next 12 months, remains low. Lviv's LTFC IDR is insulated from Ukraine's recent downgrades, as its financial profile is sufficiently strong to withstand a sovereign default. Martial law has been in force in Ukraine since the Russian war began in February 2022. The war has led to significant legal changes affecting also local and regional governments' (LRGs) finances, complicating financial planning. KEY RATING DRIVERS Risk Profile: 'Vulnerable' This assessment is in line with all Fitch-rated Ukrainian cities. The assessment reflects Fitch's view that there is a very high risk of the issuer's ability to cover debt service with the operating balance weakening unexpectedly over the scenario horizon (2024-2025) due to lower revenue, higher expenditure, or an unexpected rise in liabilities or debt-service requirements. Revenue Robustness: 'Weaker' Tax revenue (83% of total revenue) and state transfers (11%) dominated Lviv's revenue in 2023. Revenue remains unstable due to the weakening operating risk environment in Ukraine and despite a 49% growth in income tax revenue in 2021-2023. Fitch expects Lviv's income tax revenue to decrease in 2024, in line with expectations for most of the rated Ukrainian cities. Financial stability might improve once the war ends and the central government continues with LRG reforms. Revenue Adjustability: 'Weaker' Lviv has limited ability to generate additional revenue in response to an economic downturn. Income tax rates and current transfers are decided by the central government. Local tax revenues were 32% of total revenue in 2023, while taxes over which Lviv has some limited rate-setting power provide for around 26% of city's total revenue. Economic conditions make it difficult for households to afford higher taxes. Although an equalisation scheme is in place for LRGs in Ukraine, Lviv does not benefit or contribute to it as its personal income tax (PIT) revenue per capita is within the range that means it does not qualify for it. Expenditure Sustainability: 'Weaker' Lviv's main mandatory responsibilities (education, housing, utilities, social and health care), around 58% of total expenditure, are largely non-cyclical. High inflation (Fitch forecasts 6.1% in 2024 and 7.6% in 2025) exacerbates expenditure pressure, especially in a volatile framework affected by war damage and the costs of hosting internal refugees. Rising costs, including frequent minimum wage adjustments by the government, will strain the city's budget. Capex remains volatile due to the ongoing war, with significant infrastructure repair required and transfers to municipal companies. The city will likely need to rely on loans from IFIs and grants to finance its needs. Expenditure Adjustability: 'Weaker' Lviv's ability to reduce spending is limited due to mandatory responsibilities and a volatile expenditure framework affected by war damage and inflation. Operating on a 'pay-as-you-go' basis makes long-term investments difficult. Capex represented 27% of total expenditure in 2023, with 70% of capex transfers to municipal companies. The city and its municipal companies face significant underfunding and high investment needs. Combined with already high contributions to the municipal companies, this may further strain the city's spending. Liabilities & Liquidity Robustness: 'Weaker' Ukrainian cities operate in a difficult debt and liquidity management framework due to an unpredictable domestic capital market and a banking sector with sub-investment-grade counterparties. Access to international markets is limited, undermined by recent sovereign defaults. Cities need to rely on short- to medium-term floating interest rate loans and unhedged medium- to long-term foreign currency debt from IFIs, exposing them to significant interest rate and currency risks. Additionally, municipal companies carry risky debt, including FX debt provided by IFIs, further contributing to financial instability. Liabilities & Liquidity Flexibility: 'Weaker' High counterparty risk and limited effectiveness of emergency state liquidity, given the sovereign's sub-investment-grade ratings, drive this assessment. Liquidity challenges are worsened by reliance on domestic banks rated below 'BBB-'. Lviv's cash position improved to almost UAH850 million at end-2023, compared with UAH611 million at end-2021, but this results mainly from suspended investments in 2022, which led to cash accumulation. Cash might be depleted, as Fitch expects the city to resume investments. Financial Profile: 'b category' Fitch assesses Lviv's financial profile in the 'b' category, despite favourable payback ratios on average at 1.8x between 2021 and 2023. This assessment considers the war's detrimental impact on the national economy and infrastructure, which affects the city's short- and medium-term performance. The war introduces great uncertainty, including changes in PIT revenue generation and distribution, high inflation, and increased infrastructure investment needs. These factors collectively increase the risk of unfavourable economic developments, which may lead to the increased borrowing needs and directly affect the city's debt servicing ability. Future debt repayments are a risk, and Fitch expects an increase in direct debt to finance investments. However, Fitch observes changes in the legal framework, in particular the easing of restrictions on foreign-currency debt servicing, leading to an improvement in the financial profile. The availability of liquidity lines and loans from IFIs further supports the city's financial position. ESG - Political Stability and Rights: Russia's invasion and subsequent ongoing full-scale war has severely compromised the city's political stability and the security outlook. The war has caused many deaths and extensive property damage, with the aim of changing the city's government and/or occupying its territory. ESG - Creditor Rights: The protracted war has weakened the city's ability to service and repay debt. However, Fitch observes some improvement in the legal framework easing restrictions to service foreign-currency debt. IFIs' financing starts to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. Derivation Summary The combination of Lviv's unchanged 'Vulnerable' risk profile and improved, but remaining in 'b' category, financial profile assessments indicate an SCP of 'b' or below. The 'ccc' SCP results from the application of the Lower Speculative Grade of Fitch's International Local and Regional Government Rating Criteria. Fitch qualitatively assesses the city's risk of default, and the remaining margin of safety based on overall performance and guided by rating definitions. The 'ccc' SCP indicates that default is still a real possibility and reflects significant refinancing needs and liquidity risk, even if an immediate or unavoidable default is not expected or the city has no current debt, and the city's limited ability to adverse economic conditions. Fitch does not see a risk of the city's inability to service its debt, particularly over the next 12 months. Due to Ukraine's 'RD' LTFC IDR, which resulted from the government's recent default on its Eurobonds, the sovereign rating cap is currently not applicable. Fitch believes that due to its sufficiently strong financial profile, the city can withstand a sovereign default, so its LTFC IDR is insulated from recent sovereign downgrades. Fitch explained the rationale behind this in the Fitch Wire published on 20 August 2024 (Ukrainian City Ratings Are Not Directly Affected by Sovereign Default). There are no factors affecting the ratings other than the SCP, and the city's LTFC and LTLC IDRs are equal to its SCP. National Ratings Lviv's National Rating is 'AA(ukr)', the highest possible rating corresponding to the 'CCC' LTLC IDR. The city's diversified revenue base and existing spending flexibility, proven by significant spending cuts in 2022, show that, like other Ukrainian LRGs, they are in a stronger position than national peers from other asset classes, justifying the highest possible National Rating for the given mapping. Key Assumptions Qualitative assumptions: Risk Profile: 'Vulnerable, Unchanged with Low weight' Revenue Robustness: 'Weaker, Unchanged with Low weight' Revenue Adjustability: 'Weaker, Unchanged with Low weight' Expenditure Sustainability: 'Weaker, Unchanged with Low weight' Expenditure Adjustability: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low weight' Financial Profile: 'b, Improved with High weight' Asymmetric Risk: 'N/A, Unchanged with Low weight' Support (Budget Loans): 'N/A, Unchanged with Low weight' Support (Ad Hoc): 'N/A, Unchanged with Low weight' Rating Cap (LT IDR): 'N/A, Unchanged with Low weight' Rating Cap (LT LC IDR) 'N/A, Unchanged with Low weight' Rating Floor: 'N/A, Unchanged with Low weight' Quantitative assumptions - Issuer Specific Fitch's rating action is driven by the following assumptions for reference metrics under its 2024-2025 rating case scenario. These include their respective changes since the last review and weights in the rating decision: - Payback ratio: below 5.0x, unchanged with low weight - Actual coverage ratio: above 1.7x, unchanged with low weight - Fiscal debt burden: below 50%, unchanged with low weight. Fitch's rating case typically follows a "through-the-cycle" scenario, incorporating a combination of revenue, cost, and financial risk stresses. Under normal circumstances, this would be based on historical figures from 2019-2023 and projected ratios for 2024-2028. However, the war has severely disrupted Ukraine's economy and the financial capacity of its LRGs, impairing even mid-term planning ability. This disruption has significantly constrained its ability to develop a reliable rating scenario due to high uncertainty and volatility. Consequently, Fitch is limited to projecting key assumptions for the scenario only for 2024-2025. The key assumptions for the scenario include: - Annual average 4.2% increase in operating revenue, driven mainly by tax revenue growth (4.4%) and current transfers growth (5.7%); - Annual average 7.9% increase in operating spending; rising inflation, expectations of salary growth pressures spending as well as higher transfers to the municipal companies; - Annual net capex of UAH1.5 billion on average; considers uncertainty about the timing and amount of available capital grants as well as debt financing; - Apparent cost of debt to be on average 9.5% in 2024-2025, around 1.5% below the average cost of debt in 2023 as the National Bank of Ukraine gradually reduced the discount rate from 25% in January 2023 to 13% in June 2024; - Municipal companies' debt only based on current knowledge about debt-financed investment plans; new debt assumed from IFIs, which provides financing with lower interest rate and longer tenors. Quantitative assumptions - Sovereign Related Figures as per Fitch's sovereign actual for 2023 and forecast for 2026, respectively (no weights and changes since the last review are included as none of these assumptions were material to the rating action): - GDP per capita (US dollar, market exchange rate): 5,014; 5,333 - Real GDP growth (%): 5.3; 5.0 - Consumer prices (annual average % change): 12.9; 5.8 - General government balance (% of GDP): -19.5; -12.7 - General government debt (% of GDP): 84.4; 103.0 - Current account balance plus net FDI (% of GDP): -2.8; -6.7 - Net external debt (% of GDP): -16.5; 15.1 - IMF Development Classification: EM (emerging market) - CDS Market Implied Rating: n/a Liquidity and Debt Structure Based on the information provided by Lviv, the city is current on all financial commitments. Summary of Financial Adjustments To make data internationally comparable and compatible with its rating criteria, Fitch adjusted the city's financial data, in particular when calculating operating balance and adjusted debt: - Fitch-operating balance includes the state subsidy (2021: UAH352.0 million) directed through the city's budget but aimed at debt settlement of the heat and water supply companies as operating revenue, despite its allocation to the special fund, due to its operating purpose related to tariff adjustments. - Fitch-adjusted debt includes the guaranteed debt of municipal companies as, in Fitch's view, it could crystallise as direct obligations under unfavourable economic conditions. Issuer Profile Lviv is a cultural and historical city in western Ukraine with a population of around 717,300 as of January 2022. Lviv's economy is driven by a growing IT sector, tourism, light manufacturing, and trade, leveraging its proximity to the EU border. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Increased risk of default due to weakened liquidity that could pressure the city's ability to service debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Overall financial stabilisation of the city, along with a reduced risk of liquidity stress and greater confidence in the domestic capital market, leading to enhanced financial stability and increased liquidity, could result in an upgrade. ESG Considerations Lviv has an ESG Relevance Score of '5' for Political Stability and Rights due to the severe impact of the war with Russia, which has compromised the cities political stability and security outlook, negatively affecting their credit profiles and ratings. The war has resulted in many casualties and extensive property damage. Lviv has an ESG Relevance Score of '4' for Creditor Rights due to improving, but still weakened ability to service and repay debt. The protracted war has weakened the city's ability to service and repay debt, however Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing start to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. 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. Discussion Note Committee date: 15 October 2024 There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion. Entity/Debt Rating Prior ----------- ------ ----- Lviv, City of LT IDR CCC Upgrade CC LC LT IDR CCC Affirmed CCC Natl LT AA(ukr)Affirmed AA(ukr) CITY OF MYKOLAIV: Fitch Hikes LongTerm Foreign Currency IDR to CCC ------------------------------------------------------------------ Fitch Ratings has upgraded the Ukrainian City of Mykolaiv's Long-Term Foreign-Currency (LTFC) Issuer Default Ratings (IDR) to 'CCC' from 'CC'. Fitch has affirmed the Long-Term Local-Currency (LTLC) IDR at 'CCC'. Ratings at this level typically do not carry Outlooks due to their high volatility. The upgrade of the LTFC IDR is based on evidenced financial resilience, despite significant financing needs and liquidity risks. The city still has little capacity to navigate the adverse economic conditions, reflected in the unchanged 'ccc' Standalone Credit Profile (SCP). Fitch expects an increase in the city's and city-guaranteed municipal companies' debt from international financial institutions (IFIs), but the probability of default, particularly over the next 12 months, remains low. Mykolaiv's LTFC IDR is insulated from Ukraine's recent downgrades, as its financial profile is sufficiently strong to withstand a sovereign default. Martial law has been in force in Ukraine since the war with Russia began in February 2022. The war has led to significant legal changes affecting local and regional governments' (LRGs) finances, complicating financial planning. KEY RATING DRIVERS Risk Profile: 'Vulnerable' Fitch assesses the city's risk profile as 'Vulnerable', in line with all Fitch-rated Ukrainian cities. The assessment reflects Fitch's view that there is a very high risk of the issuer's ability to cover debt service with the operating balance weakening unexpectedly over the scenario horizon (2024-2025) due to lower revenue, higher expenditure, or an unexpected rise in liabilities or debt-service requirements. Revenue Robustness: 'Weaker' In 2023, tax revenue (79% of total revenue) and state transfers (14%) dominated Mykolaiv's revenue. Revenue remains unstable due to the weakening operating risk environment in Ukraine and despite 52% growth in income tax revenue in 2021-2023. Fitch expects Mykolaiv's income tax revenue to decrease in 2024, in line with expectations for most of rated Ukrainian cities. Financial stability might improve once the war ends and the central government continues with LRG reforms. Revenue Adjustability: 'Weaker' Mykolaiv has limited ability to generate additional revenue in response to an economic downturn. Income tax rates and current transfers are decided by the central government. The local tax revenues were 19% of total revenue in 2023, while taxes for which Mykolaiv has some limited rate-setting power provide for around 13% of total revenue. Economic conditions make it difficult for households to afford higher taxes. Although an equalisation scheme is in place for LRGs in Ukraine, Mykolaiv does not benefit from or contribute to it as its personal income tax (PIT) revenue per capita was within the range that means it does not qualify for it. Expenditure Sustainability: 'Weaker' The city's main mandatory responsibilities (education, housing, utilities, social and health care), around 55% of total expenditure, are largely non-cyclical. High inflation (Fitch forecasts 6.1% in 2024 and 7.6% in 2025) exacerbates expenditure pressure, especially in a volatile framework affected by war damage and the costs of hosting internal refugees. Rising costs, including frequent minimum wage adjustments by the government, will strain the city's budget. Capex remains volatile due to the ongoing war, with significant infrastructure repair required and transfers to municipal companies. The city will likely need to rely on loans from IFIs and grants to finance its needs. Expenditure Adjustability: 'Weaker' Mykolaiv's ability to reduce spending is limited due to mandatory responsibilities and a volatile expenditure framework affected by war damage and inflation. Operating on a 'pay-as-you-go' basis makes long-term investments difficult. Capex represented 31% of total expenditure in 2023, with 57% of capex transfers to municipal companies. The city and its municipal companies face significant underfunding and high investment needs. Combined with already high contributions to the municipal companies, this may further strain the city's spending. Liabilities & Liquidity Robustness: 'Weaker' Ukrainian cities operate in difficult debt and liquidity management framework due to an unpredictable domestic capital market and a banking sector with sub-investment grade counterparties. Access to the international markets is limited, undermined by recent sovereign defaults. Cities need to rely on short- to medium-term floating interest rate loans and unhedged medium- to long-term foreign-currency debt from IFIs, exposing them to significant interest rate and currency risks. Additionally, municipal companies carry risky debt, including FX debt provided by IFIs, further contributing to financial instability. Liabilities & Liquidity Flexibility: 'Weaker' High counterparty risk and limited effectiveness of emergency state liquidity, given the sovereign's sub-investment-grade ratings, drive this assessment. Liquidity challenges are worsened by reliance on domestic banks rated below 'BBB-'. Mykolaiv's cash position improved to almost UAH1.3 billion at the end-2023, compared with 2021, but this mainly resulted from suspended investments in 2022, which lead to cash accumulation. Cash might be depleted, as Fitch expects the city to resume investments. Financial Profile: 'b category' Fitch assesses Mykolaiv's financial profile in the 'b' category, despite favourable payback ratios below 0x in 2021-2023. The assessment considers the war's detrimental impact on the national economy and infrastructure, which affects the city's short- and medium-term performance. The war introduces great uncertainty, including changes in PIT revenue generation and distribution, high inflation, and increased infrastructure investment needs. These factors together increase the risk of unfavourable economic developments, which may lead to increased borrowing needs and directly affect the city's debt servicing ability. Future debt repayments are a concern, and Fitch expects increase in direct debt to finance investments. However, Fitch observes changes in the legal framework, in particular the easing of restrictions on foreign-currency debt servicing, leading to an improvement in the financial profile. The availability of liquidity lines and loans from IFIs further supports the city's financial position. ESG - Political Stability and Rights: Russia's invasion and subsequent ongoing full-scale war has severely compromised the city's political stability and the security outlook. The war has caused many deaths and extensive property damage, with the aim of changing the city's government and/or occupying its territory. ESG - Creditor Rights: The protracted war has weakened the city's ability to service and repay debt. However, Fitch observes some improvement in the legal framework easing restrictions to service foreign-currency debt. IFIs' financing starts to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. Derivation Summary The combination of an unchanged 'Vulnerable' risk profile and improved, but remaining in the 'b' category, financial profile indicate an SCP of 'b' or below. The 'ccc' SCP results from the application of the Lower Speculative Grade of Fitch's International Local and Regional Government Rating Criteria. Fitch qualitatively assesses the city's risk of default, and the remaining margin of safety based on overall performance and guided by rating definitions. The 'ccc' SCP indicates that default is still a real possibility and reflects significant refinancing needs and liquidity risk, even if an immediate or unavoidable default is not expected or the city has no current debt, and the city's limited ability to adverse economic conditions. Fitch does not see a risk of the city's inability to service its debt, particularly over the next 12 months. Due to Ukraine's 'RD' LTFC IDR, which resulted from the government's recent default on its Eurobonds, the sovereign rating cap is currently not applicable. Fitch believes that due to its sufficiently strong financial profile the city can withstand a sovereign default, so its LTFC IDR is insulated from recent sovereign downgrades. This is explained in the Fitch Wire published on 20 August 2024 ('Ukrainian City Ratings Are Not Directly Affected by Sovereign Default'). There are no other factors affecting the ratings other than the SCP, and the city's LTFC and LTLC IDRs are equal to its SCP. Key Assumptions Qualitative assumptions: Risk Profile: 'Vulnerable, Unchanged with Low weight' Revenue Robustness: 'Weaker, Unchanged with Low weight' Revenue Adjustability: 'Weaker, Unchanged with Low weight' Expenditure Sustainability: 'Weaker, Unchanged with Low weight' Expenditure Adjustability: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low weight' Financial Profile: 'b, Improved with High weight' Asymmetric Risk: 'N/A, Unchanged with Low weight' Support (Budget Loans): 'N/A, Unchanged with Low weight' Support (Ad Hoc): 'N/A, Unchanged with Low weight' Rating Cap (LT IDR): 'N/A, Unchanged with Low weight' Rating Cap (LT LC IDR) 'N/A, Unchanged with Low weight' Rating Floor: 'N/A, Unchanged with Low weight' Quantitative assumptions - Issuer Specific Fitch's rating action is driven by the following assumptions for reference metrics under its 2024-2025 rating case scenario. These include their respective changes since the last review and weights in the rating decision: - Payback ratio: below 5.0x, unchanged with low weight - Actual coverage ratio: above 1.7x, unchanged with low weight - Fiscal debt burden: below 50%, unchanged with low weight. Fitch's rating case typically follows a "through-the-cycle" scenario, incorporating a combination of revenue, cost, and financial risk stresses. Under normal circumstances, this would be based on historical figures from 2019-2023 and projected ratios for 2024-2028. However, the war has severely disrupted Ukraine's economy and the financial capacity of its LRGs, impairing even the mid-term planning ability. This disruption has significantly constrained its ability to develop a reliable rating scenario due to high uncertainty and volatility. Consequently, Fitch is limited to projecting key assumptions for the scenario only for the years 2024-2025. The key assumptions for the scenario include: - Annual average 3.6% decrease in operating revenue, driven mainly by tax revenue decline (-11.1%), somewhat mitigated by increasing transfers (34% growth); - Annual average 3.0% increase in operating spending; raising inflation, expectations of salary growth pressures spending as well as higher transfers to municipal companies; - Annual net capex of UAH1.4 billion on average; considers uncertainty about the timing and amount of available capital grants as well as debt financing; - Average cost of debt below 6% a year in 2024-2025, excluding the interest-free loan from the government, and medium- to long-term maturities of new debt (minimum five years); no interest costs caps assumed; new debt assumed only from IFIs, which provides financing with lower interest rates than domestic banks in Ukraine; - Municipal companies' debt only based on current knowledge about the debt financed investment plans. However, increase in debt very probable. Quantitative assumptions - Sovereign Related Figures as per Fitch's sovereign actual for 2023 and forecast for 2026, respectively (no weights and changes since the last review are included as none of these assumptions were material to the rating action): - GDP per capita (US dollar, market exchange rate): 5,014; 5,333 - Real GDP growth (%): 5.3; 5.0 - Consumer prices (annual average % change): 12.9; 5.8 - General government balance (% of GDP): -19.5; -12.7 - General government debt (% of GDP): 84.4; 103.0 - Current account balance plus net FDI (% of GDP): -2.8; -6.7 - Net external debt (% of GDP): -16.5; 15.1 - IMF Development Classification: EM (emerging market) - CDS Market Implied Rating: n/a Liquidity and Debt Structure Based on the information provided by Mykolaiv, the city is current on all financial commitments. Summary of Financial Adjustments To make data internationally comparable and compatible with its rating criteria, Fitch adjusted the city's financial data, in particular when calculating operating balance and adjusted debt: - Fitch-operating balance includes the state subsidy (2021: UAH369.4 million) directed through the city's budget but aimed at debt settlement of the heat and water supply companies as operating revenue, despite its allocation to the special fund, due to its operating purpose related to tariff adjustments. - Fitch-adjusted debt includes the guaranteed debt of municipal companies as, in Fitch's view, it could crystallise as a direct obligation under unfavourable economic conditions. Issuer Profile Mykolaiv is the capital of the Mykolaiv region and had a population of about 470,000 as of January 2022. The city's economy revolves around shipbuilding, ports, and maritime industries, as well as machinery and food processing. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Increased risk of default due to weakened liquidity that could pressure the city's ability to service debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Overall financial stabilisation of the city, along with a reduced risk of liquidity stress and greater confidence in the domestic capital market, leading to enhanced financial stability and increased liquidity, could result in an upgrade of the city's ratings. ESG Considerations Mykolaiv has an ESG Relevance Score of '5' for Political Stability and Rights due to the severe impact of the war with Russia, which has compromised the cities political stability and security outlook, negatively affecting their credit profiles and ratings. The war has resulted in many casualties and extensive property damage. Mykolaiv has an ESG Relevance Score of '4' for Creditor Rights due to improving, but still weakened ability to service and repay debt. The protracted war has weakened the city's ability to service and repay debt, however Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing start to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. 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. Discussion Note Committee date: 15 October 2024 There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion. Entity/Debt Rating Prior ----------- ------ ----- Mykolaiv, City of LT IDR CCC Upgrade CC LC LT IDR CCC Affirmed CCC CITY OF ODESA: Fitch Hikes LongTerm Foreign Currency IDR to 'CCC' ----------------------------------------------------------------- Fitch Ratings has upgraded the Ukrainian City of Odesa's Long-Term Foreign-Currency (LTFC) Issuer Default Ratings (IDR) to 'CCC' from 'CC'. Fitch has also affirmed the Long-Term Local-Currency (LTLC) IDR at 'CCC'. Ratings at this level typically do not carry Outlooks due to their high volatility. The upgrade is based on Odesa's evidenced financial resilience, despite significant financing needs and liquidity risks. The city still has little capacity to navigate the adverse economic conditions, as reflected in the unchanged 'ccc' Standalone Credit Profile (SCP). Fitch expects an increase in the city's and city-guaranteed municipal companies' debt from international financial institutions (IFIs), but the probability of default, particularly over the next 12 months, remains low. Odesa's LTFC IDR is insulated from Ukraine's recent downgrades, as its financial profile is sufficiently strong to withstand a sovereign default. Martial law has been in force in Ukraine since the Russian war began in February 2022. The war has led to significant legal changes affecting local and regional governments' (LRGs) finances, complicating financial planning. KEY RATING DRIVERS Risk Profile: 'Vulnerable' This assessment is in line with all Fitch-rated Ukrainian cities. It reflects Fitch's view that there is a very high risk of the issuer's ability to cover debt service with the operating balance weakening unexpectedly over the scenario horizon (2024-2025) due to lower revenue, higher expenditure, or an unexpected rise in liabilities or debt-service requirements. Revenue Robustness: 'Weaker' In 2023, tax revenue (76% of total revenue) and state transfers (15%) dominated Odesa's revenue. Revenue remains unstable due to the weakening operating risk environment in Ukraine and despite 15% growth in income tax revenue in 2021-2023. Fitch expects Odesa's income tax revenue to decrease in 2024, in line with its expectations for most rated Ukrainian cities. Financial stability might improve once the war ends and the central government continues with LRG reforms. Revenue Adjustability: 'Weaker' Odesa has limited ability to generate additional revenue in response to an economic downturn. Income tax rates and current transfers are decided by the central government. Local tax revenues were 29% of city's total revenue in 2023, while taxes for which Odesa has some limited rate setting power provided around 22%. Economic conditions make it difficult for households to afford higher taxes. Although an equalisation scheme is in place for LRGs in Ukraine, Odesa is a contributor to it as its personal income tax (PIT) revenue per capita is above 110% of the national average, qualifying for payment of the reverse subsidy. Expenditure Sustainability: 'Weaker' The city's main mandatory responsibilities (education, housing, utilities, social and health care), around 56% of total expenditure, are largely non-cyclical. High inflation (Fitch forecast 6.1% in 2024 and 7.6% in 2025) exacerbates expenditure pressure, especially in a volatile framework affected by war damage and the costs of hosting internal refugees. Rising costs, including frequent minimum wage adjustments by the government, will strain the city's budget. Capex remains volatile due to the ongoing war, with significant infrastructure repair required and transfers to municipal companies. The city will likely need to rely on loans from IFIs and grants to finance its needs. Expenditure Adjustability: 'Weaker' Odesa's ability to reduce spending is limited due to mandatory responsibilities and a volatile expenditure framework affected by war damage and inflation. Operating on a 'pay-as-you-go' basis makes long-term investments difficult. Capex represented 27% of total expenditure in 2023, with 36% of capex capital transfers. The city and its municipal companies face significant underfunding and high investment needs. Combined with already high contributions to the municipal companies, this may further strain the city's spending. Liabilities & Liquidity Robustness: 'Weaker' Ukrainian cities operate in a difficult debt and liquidity management framework due to an unpredictable domestic capital market and a banking sector with sub-investment-grade counterparties. Access to international markets is limited, undermined by recent sovereign defaults. Cities need to rely on short- to medium-term floating interest rate loans and unhedged medium- to long-term foreign currency debt from IFIs, exposing them to significant interest rate and currency risks. Additionally, municipal companies carry risky debt, including FX debt provided by IFIs, further contributing to financial instability. Liabilities & Liquidity Flexibility: 'Weaker' High counterparty risk and the limited effectiveness of emergency state liquidity, given the sovereign's sub-investment-grade ratings, drive this assessment. Liquidity challenges are worsened by reliance on domestic banks rated below 'BBB-'. Odesa's cash position improved to over UAH1.6 billion at the end-2023, compared with 2021, but this was mainly a result of suspended investments in 2022, which lead to cash accumulation. Cash might be depleted, as Fitch expects the city to resume investments. Financial Profile: 'b category' Fitch assesses the financial profile of Odesa in the 'b' category, despite favourable payback ratios around 0x-1x in 2021-2023. This assessment considers the war's detrimental impact on the national economy and infrastructure, which affects the city's short and medium-term performance. The war introduces great uncertainty, including changes in PIT revenue generation and distribution, high inflation, and increased infrastructure investment needs. These factors collectively elevate the risk of unfavourable economic developments, which may lead to increased borrowing needs and directly affect the city's debt servicing ability. Future debt repayments are a risk, and Fitch expects an increase in direct debt to finance investments. Fitch has observed changes in the legal framework, in particular the easing of restrictions on foreign-currency debt servicing, leading to an improvement in the financial profile. The availability of liquidity lines and loans from IFIs further supports the city's financial position. ESG - Political Stability and Rights: Russia's invasion and subsequent ongoing full-scale war has severely compromised the city's political stability and the security outlook. The war has caused many deaths and extensive property damage, with the aim of changing the city's government and/or occupying its territory. ESG - Creditor Rights: The protracted war has weakened the city's ability to service and repay debt. However, Fitch observes some improvement in the legal framework easing restrictions to service foreign-currency debt. IFIs' financing has also started to resume, in the form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. Derivation Summary The combination of an unchanged 'Vulnerable' risk profile and improved, but remaining in the 'b' category, financial profile indicate an SCP of 'b' or below. The 'ccc' SCP results from the application of the Lower Speculative Grade of Fitch's International Local and Regional Government Rating Criteria. Fitch qualitatively assesses the city's risk of default, and the remaining margin of safety based on overall performance and guided by rating definitions. The 'ccc' SCP indicates that default is still a real possibility and reflects significant refinancing needs and liquidity risk, even if an immediate or unavoidable default is not expected or the city has no current debt, and the city's limited ability to adverse economic conditions. Fitch does not see a risk of the city's inability to service its debt, particularly over the next 12 months. Due to Ukraine's 'RD' LTFC IDR, which resulted from the government's recent default on its Eurobonds, the sovereign rating cap is currently not applicable. Fitch believes that due to its sufficiently strong financial profile, the city could withstand a sovereign default, so its LTFC IDR is insulated from the recent sovereign downgrades. Fitch explained the rationale behind this in the Fitch Wire published on 20 August 2024 ('Ukrainian City Ratings Are Not Directly Affected by Sovereign Default'). There are no factors affecting the ratings other than the SCP, and the city's LTFC and LTLC IDRs are equal to its SCP. Key Assumptions Qualitative assumptions: Risk Profile: 'Vulnerable, Unchanged with Low weight' Revenue Robustness: 'Weaker, Unchanged with Low weight' Revenue Adjustability: 'Weaker, Unchanged with Low weight' Expenditure Sustainability: 'Weaker, Unchanged with Low weight' Expenditure Adjustability: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low weight' Financial Profile: 'b, Improved with High weight' Asymmetric Risk: 'N/A, Unchanged with Low weight' Support (Budget Loans): 'N/A, Unchanged with Low weight' Support (Ad Hoc): 'N/A, Unchanged with Low weight' Rating Cap (LT IDR): 'N/A, Unchanged with Low weight' Rating Cap (LT LC IDR) 'N/A, Unchanged with Low weight' Rating Floor: 'N/A, Unchanged with Low weight' Quantitative assumptions - Issuer Specific Fitch's rating action is driven by the following assumptions for reference metrics under its 2024-2025 rating case scenario. These include their respective changes since the last review and weights in the rating decision: - Payback ratio: below 5.0x, unchanged with low weight - Actual coverage ratio: above 1.7x, unchanged with low weight - Fiscal debt burden: below 50%, unchanged with low weight. Fitch's rating case typically follows a "through-the-cycle" scenario, incorporating a combination of revenue, cost, and financial risk stresses. Under normal circumstances, this would be based on historical figures from 2019-2023 and projected ratios for 2024-2028. However, the war has severely disrupted Ukraine's economy and the financial capacity of its LRGs, impairing even the mid-term planning ability. This disruption has significantly constrained its ability to develop a reliable rating scenario due to high uncertainty and volatility. Consequently, Fitch is limited to projecting key assumptions for the scenario only for the years 2024-2025. The key assumptions for the scenario include: - Annual average 4.3% increase in operating revenue, driven mainly by tax revenue growth (5.7%), mitigating decreasing transfers (-0.5% growth); - Annual average 12.9% increase in operating spending; raising inflation, expectations of salary growth pressures spending as well as higher transfers to the municipal companies; - Annual net capex of UAH3.3 billion on average; considers uncertainty about the timing and amount of available capital grants as well as debt financing; - No cost of debt in 2024-2025, as the only direct debt of the city is the interest-free loan from the government, and no new loans or bonds are planned; - Municipal companies' debt only based on current knowledge about the debt financed investment plans. However, increase in debt very probable. Quantitative assumptions - Sovereign Related Figures as per Fitch's sovereign actual for 2023 and forecast for 2026, respectively (no weights and changes since the last review are included as none of these assumptions were material to the rating action): - GDP per capita (US dollar, market exchange rate): 5,014; 5,333 - Real GDP growth (%): 5.3; 5.0 - Consumer prices (annual average % change): 12.9; 5.8 - General government balance (% of GDP): -19.5; -12.7 - General government debt (% of GDP): 84.4; 103.0 - Current account balance plus net FDI (% of GDP): -2.8; -6.7 - Net external debt (% of GDP): -16.5; 15.1 - IMF Development Classification: EM (emerging market) - CDS Market Implied Rating: n/a Liquidity and Debt Structure Odesa has fully repaid its financial commitments, with exception of the loan from the government, which is interest-free and should be eventually written off. Summary of Financial Adjustments To make data internationally comparable and compatible with its rating criteria, Fitch adjusted the city's financial data, in particular when calculating the adjusted debt: Fitch-adjusted debt includes the guaranteed debt of municipal companies as, in Fitch's view, it could crystallise as a direct obligation under unfavourable economic conditions. Issuer Profile Odesa city, the capital of the Odesa region, had a population of over one million in January 2022 (most recent available public data). The city is a major port city in southern Ukraine. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Increased risk of default due to weakened liquidity that could pressure the city's ability to service debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Overall financial stabilisation of the city, along with a reduced risk of liquidity stress and greater confidence in the domestic capital market, leading to enhanced financial stability and increased liquidity, could result in an upgrade. ESG Considerations Odesa has an ESG Relevance Score of '5' for Political Stability and Rights due to the severe impact of the war with Russia, which as compromised the cities political stability and security outlook, negatively affecting their credit profiles and ratings. The war has resulted in many casualties and extensive property damage. Odesa has an ESG Relevance Score of '4' for Creditor Rights due to due to improving, but still weakened ability to service and repay debt. The protracted war has weakened the city's ability to service and repay debt, however Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing start to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. 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. Discussion Note Committee date: 15 October 2024 There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion. Entity/Debt Rating Prior ----------- ------ ----- Odesa, City of LT IDR CCC Upgrade CC LC LT IDR CCC Affirmed CCC CITY OF ZAPORIZHZHIA: Fitch Hikes LT Foreign Currency IDR to 'CCC' ------------------------------------------------------------------ Fitch Ratings has upgraded the Ukrainian City of Zaporizhzhia's Long-Term Foreign-Currency (LTFC) Issuer Default Ratings (IDR) to 'CCC' from 'CC'. Fitch has also affirmed Long-Term Local-Currency (LTLC) IDR at 'CCC'. Ratings at this level typically do not carry Outlooks due to their high volatility. The upgrade is based on the evidenced financial resilience, despite significant financing needs and liquidity risks. The city still has little capacity to navigate the adverse economic conditions, reflected in the unchanged 'ccc' Standalone Credit Profile (SCP). Fitch expects an increase in the city's and city-guaranteed municipal companies' debt from international financial institutions (IFIs), but the probability of default, particularly over the next 12 months, remains low. Zaporizhzhia's LTFC IDR is insulated from Ukraine's recent downgrades, as its financial profile is sufficiently strong to withstand a sovereign default. Martial law has been in force in Ukraine since the Russian war began in February 2022. The war has led to significant legal changes affecting local and regional governments' (LRGs) finances, complicating financial planning. KEY RATING DRIVERS Risk Profile: 'Vulnerable' This assessment is in line with all Fitch-rated Ukrainian cities. The assessment reflects Fitch's view that there is a very high risk of the issuer's ability to cover debt service with the operating balance weakening unexpectedly over the scenario horizon (2024-2025) due to lower revenue, higher expenditure, or an unexpected rise in liabilities or debt-service requirements. Revenue Robustness: 'Weaker' Tax revenue (close to 80% of total revenue) and state transfers (above 14%) dominated Zaporizhzhia's revenue in 2023. Revenue remains unstable due to the weakening operating risk environment in Ukraine and despite 22% growth in income tax revenue in 2021-2022. Fitch expects the city's income tax revenue to decrease further in 2024 (as in 2023), in line with expectations for most of the rated Ukrainian cities. Financial stability might improve once the war ends and the central government continues with LRG reforms. Revenue Adjustability: 'Weaker' Zaporizhzhia has limited ability to generate additional revenue in response to an economic downturn. Income tax rates and current transfers are decided by the central government. Local tax revenues were 25% of total revenue in 2023, while taxes over which the city has some limited rate-setting power provided around 20%. Economic conditions make it difficult for households to afford higher taxes. Zaporizhzhia is a contributor to Ukraine's equalisation scheme due to its above-average per capita PIT revenue and was supposed to pay reverse subsidies. However, payment was only partial in 2022 due to martial law, and the requirement was suspended for 2023-2024. Expenditure Sustainability: 'Weaker' The city's main mandatory responsibilities (education, housing, utilities, social and health care), over 50% of total expenditure in 2023, are largely non-cyclical. High inflation (Fitch forecast 6.1% in 2024 and 7.6% in 2025) exacerbates expenditure pressure, especially in a volatile framework affected by war damage and the costs of hosting internal refugees. Rising costs, including frequent minimum wage adjustments by the government, will strain the city's budget. Capex remains volatile due to the ongoing war, with significant infrastructure repair required and transfers to municipal companies. The city will likely need to rely on loans from IFIs and grants to finance its needs. Expenditure Adjustability: 'Weaker' Zaporizhzhia's ability to reduce spending is limited due to mandatory responsibilities and a volatile expenditure framework affected by war damage and inflation. Operating on a 'pay-as-you-go' basis makes long-term investments difficult. Capex represented a very low 11% of totex in 2023, with 31% of capex transfers to municipal companies. The city and its municipal companies face significant underfunding and high investment needs. Combined with already high contributions to the municipal companies, this may further strain the city's spending. Liabilities & Liquidity Robustness: 'Weaker' Ukrainian cities operate in difficult debt and liquidity management framework due to an unpredictable domestic capital market and a banking sector with sub-investment grade counterparties. Access to international markets is limited, undermined by recent sovereign defaults. Cities need to rely on short- to medium-term floating interest rate loans and unhedged medium- to long-term foreign-currency debt from IFIs, exposing them to significant interest rate and currency risks. Additionally, municipal companies carry risky debt, including FX debt provided by IFIs, further contributing to financial instability. Liabilities & Liquidity Flexibility: 'Weaker' High counterparty risk and limited effectiveness of emergency state liquidity, given the sovereign's sub-investment-grade ratings, drive this assessment. Liquidity challenges are worsened by reliance on domestic banks rated below 'BBB-'. Zaporizhzhia's cash position improved to UAH276.2 million at end-2023, compared with UAH145.3 million at end-2021, but mainly results from the suspended investments in 2022, which led to cash accumulation. Cash might be depleted, as Fitch expects the city to resume investments. Financial Profile: 'b category' Fitch assesses Zaporizhzhia's financial profile as weak, despite historically favourable payback ratios between 1.0x and 1.5x in 2021-2023. This assessment considers the war's detrimental impact on the national economy and infrastructure, which affects the city's short and medium-term performance. The war introduces great uncertainty, including changes in PIT revenue generation and distribution, high inflation, and increased infrastructure investment needs. These factors collectively increase the risk of unfavourable economic developments, which may lead to increased borrowing needs and directly affect the city's debt servicing ability. Future debt repayments are a risk, and Fitch expects an increase in direct debt to finance investments. However, Fitch observes changes in the legal framework, in particular the easing of restrictions on foreign-currency debt servicing, leading to an improvement in the financial profile. The availability of liquidity lines and IFIs loans further supports the city's financial position. ESG - Political Stability and Rights: Russia's invasion and subsequent ongoing full-scale war has severely compromised the city's political stability and the security outlook. The war has caused many deaths and extensive property damage, with the aim of changing the city's government and/or occupying its territory. ESG - Creditor Rights: The protracted war has weakened the city's ability to service and repay debt. However, Fitch observes some improvement in the legal framework easing restrictions to service foreign-currency debt. IFIs' financing starts to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing Derivation Summary The combination of an unchanged 'Vulnerable' risk profile and improved, but remaining in 'b' category, financial profile assessments indicate an SCP of 'b' or below. The 'ccc' SCP results from the application of the Lower Speculative Grade of Fitch's International Local and Regional Government Rating Criteria. Fitch qualitatively assesses the city's risk of default, and the remaining margin of safety based on overall performance and guided by rating definitions. The 'ccc' SCP indicates that default is still a real possibility and reflects significant refinancing needs and liquidity risk, even if an immediate or unavoidable default is not expected or the city has no current debt, and the city's limited ability to adverse economic conditions. Fitch does not see a risk of the city's inability to service its debt, particularly over the next 12 months. Due to Ukraine's 'RD' LTFC IDR, which resulted from the government's recent default on its Eurobonds, the sovereign rating cap is currently not applicable. Fitch believes that due to its sufficiently strong financial profile, the city can withstand a sovereign default, so its LTFC IDR is insulated from recent sovereign downgrades. Fitch explained the rationale behind this in the Fitch Wire published on 20 August 2024 (Ukrainian City Ratings Are Not Directly Affected by Sovereign Default). There are no factors affecting the ratings other than the SCP, and the city's LTFC and LTLC IDRs are equal to its SCP. Short-Term Ratings The 'C' ST IDR is the only possible option corresponding to the LT IDRs of 'CCC'. Key Assumptions Qualitative and quantitative assumptions: Risk Profile: 'Vulnerable, Unchanged with Low weight' Revenue Robustness: 'Weaker, Unchanged with Low weight' Revenue Adjustability: 'Weaker, Unchanged with Low weight' Expenditure Sustainability: 'Weaker, Unchanged with Low weight' Expenditure Adjustability: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Robustness: 'Weaker, Unchanged with Low weight' Liabilities and Liquidity Flexibility: 'Weaker, Unchanged with Low weight' Financial Profile: 'b, Improved with High weight' Asymmetric Risk: 'N/A, Unchanged with Low weight' Support (Budget Loans): 'N/A, Unchanged with Low weight' Support (Ad Hoc): 'N/A, Unchanged with Low weight' Rating Cap (LT IDR): 'N/A, Unchanged with Low weight' Rating Cap (LT LC IDR) 'N/A, Unchanged with Low weight' Rating Floor: 'N/A, Unchanged with Low weight' Quantitative assumptions - Issuer Specific Fitch's rating action is driven by the following assumptions for reference metrics under its 2024-2025 rating case scenario. These include their respective changes since the last review and weights in the rating decision: - Payback ratio: below 5.0x, unchanged with low weight - Actual coverage ratio: above 1.7x, unchanged with low weight - Fiscal debt burden: below 50%, unchanged with low weight Fitch's rating case typically follows a "through-the-cycle" scenario, incorporating a combination of revenue, cost, and financial risk stresses. Under normal circumstances, this would be based on historical figures from 2019-2023 and projected ratios for 2024-2028. However, the war has severely disrupted Ukraine's economy and the financial capacity of its LRGs, impairing even the mid-term planning ability. This disruption has significantly constrained its ability to develop a reliable rating scenario due to high uncertainty and volatility. Consequently, Fitch is limited to projecting key assumptions for the scenario only for 2024-2025. The key assumptions for the scenario include: - Annual average 7.4% increase in operating revenue, driven mainly by tax revenue growth (8.6%), which is boosted by regular increases in the minimum wage and an expected national economic rebound with real GDP growth of 3.2% in 2024 and 4.4% in 2025; - Annual average 7.6% increase in opex; raising inflation, expectations of salary growth pressures spending as well as higher transfers to the municipal companies; - Annual net capex of UAH661 million on average; considers uncertainty about the timing and amount of available capital grants as well as debt financing; - Average cost of debt of 8.7% in 2024-2025, excluding the interest-free loan from the government, and medium- to long-term maturities of new debt (minimum five years); no interest costs caps assumed; - Municipal companies' debt only based on current knowledge about the debt financed investment plans. However, an increase in debt is very probable. Quantitative assumptions - Sovereign Related Figures as per Fitch's sovereign actual for 2023 and forecast for 2026, respectively (no weights and changes since the last review are included as none of these assumptions were material to the rating action): - GDP per capita (US dollar, market exchange rate): 5,014; 5,333 - Real GDP growth (%): 5.3; 5.0 - Consumer prices (annual average % change): 12.9; 5.8 - General government balance (% of GDP): -19.5; -12.7 - General government debt (% of GDP): 84.4; 103.0 - Current account balance plus net FDI (% of GDP): -2.8; -6.7 - Net external debt (% of GDP): -16.5; 15.1 - IMF Development Classification: EM (emerging market) - CDS Market Implied Rating: n/a Liquidity and Debt Structure Based on information provided by Zaporizhzhia, the city and its municipal companies are current on all financial commitments. Summary of Financial Adjustments To make data internationally comparable and compatible with its rating criteria, Fitch adjusted the city's financial data, in particular when calculating operating balance and adjusted debt: Fitch-operating balance includes the state subsidy (2021: UAH181.5 million) directed through the city's budget but aimed at debt settlement of the heat and water supply companies as operating revenue, despite its allocation to the special fund, due to its operating purpose related to tariff adjustments. Fitch-adjusted debt includes the guaranteed debt of municipal companies as, in Fitch's view, it could crystallise as direct obligations under unfavourable economic conditions. Issuer Profile Zaporizhzhia is an industrial city in south-eastern Ukraine with a population of around 710,100 as of January 2022. The average salary was UAH13,782 (Ukraine: UAH14,014). The city is known for its heavy industry, including metallurgy, machinery, and chemical production. Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade - Increased risk of default due to weakened liquidity that could pressure the city's ability to service debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade - Overall financial stabilisation of the city, along with a reduced risk of liquidity stress and greater confidence in the domestic capital market, leading to enhanced financial stability and increased liquidity, could result in an upgrade. ESG Considerations Zaporizhzhia has an ESG Relevance Score of '5' for Political Stability and Rights due to the severe impact of the war with Russia, which as compromised the cities political stability and security outlook, negatively affecting their credit profiles and ratings. The war has resulted in many casualties and extensive property damage. Zaporizhzhia has an ESG Relevance Score of '4' for Creditor Rights due to improving, but still weakened ability to service and repay debt. The protracted war has weakened the city's ability to service and repay debt, however Fitch observes some improvement in the legal framework easing restrictions to service foreign currency debt. IFIs' financing start to resume, also in form of emergency liquidity lines, which will provide the city with some headroom for cost coverage and debt servicing. 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. Discussion Note Committee Date: 15 October 2024 There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package. The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion. Entity/Debt Rating Prior ----------- ------ ----- Zaporizhzhia, City of LT IDR CCC Upgrade CC ST IDR C Affirmed C LC LT IDR CCC Affirmed CCC =========================== U N I T E D K I N G D O M =========================== AFFINITY LEASING: Butcher Woods Named as Joint Administrators ------------------------------------------------------------- Affinity Leasing Limited was placed in administration proceedings in the High Court of Justice, Business & Property Courts of England & Wales, Insolvency & Companies List (ChD), Court Number: CR-2024-005852, and Richard Paul James Goodwin and Roderick Graham Butcher of Butcher Woods were appointed as administrators on Oct. 16, 2024. Affinity Leasing rents and leases cars and light motor vehicles. Its registered office is at Unit 30 Coppice Trading Estate, Kidderminster, DY11 7QY. Its principal trading address is at Unit 30 Coppice Trading Estate, Kidderminster, DY11 7QY. The joint administrators can be reached at: Richard Paul James Goodwin Roderick Graham Butcher Butcher Woods 79 Caroline Street Birmingham B3 1UP For further information, contact: James Stallard Email: james.stallard@butcher-woods.co.uk Tel No: 0121 236 6001 ARTHUR MIDCO: Moody's Lowers CFR to B3, Outlook Remains Stable -------------------------------------------------------------- Moody's Ratings has downgraded Arthur Midco Limited's (A-Gas or the company) long-term corporate family rating to B3 from B2 and the probability of default rating to B3-PD from B2-PD. Concurrently, Moody's have downgraded to B3 from B2 the instrument ratings of the $520 million senior secured term loan B due 2029 and the $60 million senior secured revolving credit facility (RCF) due 2028 respectively raised by Arthur US Finco, Inc. and Arthur Bidco Limited. The outlook remains stable for all entities. RATINGS RATIONALE The downgrade of A-Gas' CFR to B3 reflects the company's weak operating performance during the first six months of 2024, with revenue and Company-reported EBITDA decreasing by 9% and 24%, respectively. The deterioration in operating performance is mainly driven by a sharp fall of around 25% in the market pricing for hydrofluorocarbons (HFCs) in the US market caused by liquidation of excess stocks which had been accumulated prior to the start of the quota phase-down of virgin HFCs (including imports) in 2022, and which saw a 30% stepdown at the start of 2024. The decrease in EBITDA generation during the first half of 2024 led to an increase in Moody's-adjusted debt/EBITDA for the last 12 months (LTM) ending June 30, 2024 to 6.3x from an estimated proforma level of 5.0x at year-end 2023. The downgrade also reflects Moody's expectation that HFCs market pricing will not rebound significantly over the next 12-18 months and continue to negatively impact A-Gas' operating performance. Moody's forecast that EBITDA generation will improve mainly due to cost saving initiatives. If achieved, this level of profitability will result in a Moody's-adjusted debt/EBITDA ratio of 5.8x and a Moody's-adjusted EBITA/Interest Expense above 1.0x by the end of 2025, however, this still represents a significant deterioration of credit metrics relative to Moody's previous expectations. The downgrade also reflects Moody's revised expectation that free cash flow generation during the full year of 2024 will be significantly negative, which contrasted with Moody's previous expectations of positive GBP17 million. In 2025, Moody's forecast that alongside its cost savings initiatives, the company will also reduce capex spending to maintenance levels in order to conserve cash and improve free cash flow generation to low single-digit positive levels. The B3 CFR is also supported by the company's (i) leading position in the life cycle management of refrigerant gases, especially in the areas of recovery and reclamation; (ii) its significant separation capacity, and the established recovery and reclamation infrastructure network in the major markets where it operates; and (iii) its good profitability relative to other rated distributors of chemical goods. Conversely, the CFR is constrained by the company's (i) limited scale and significant geographical concentration in the US; (ii) product focus on a commoditised end product within a competitive, volatile and fragmented market; and (iii) significant supplier concentration. LIQUIDITY The company's liquidity is adequate, but it has weakened given the weaker operating performance and high interest costs and capex spending which led to material ongoing negative free cash flow generation. Although the cash balance at the end of June 2024 was GBP15 million, the availability under the $60 million RCF was only $29 million (approximately GBP22 million). While Moody's expect free cash flow generation to return to positive levels in 2025, Moody's forecast that the RCF will remain drawn at similar levels. The debt structure includes a springing senior secured net leverage covenant set at 8.75x, tested if the RCF is drawn by more than 35%. STRUCTURAL CONSIDERATIONS The $520 million senior secured term loan B and the $60 million RCF are rated B3, in line with the B3 CFR and reflecting both their pari passu ranking and the absence of any significant liabilities ranking ahead or behind them. The debt instruments share the same security package and are guaranteed by a group of companies representing more than 100% of the consolidated group's EBITDA on day one. RATIONALE FOR THE STABLE OUTLOOK The stable outlook reflects Moody's expectations that market prices for HFCs will remain at current levels over the next 12 to 18 months. The outlook also reflects Moody's expectations that the company will be able to implement significant cost saving and capex reduction initiatives that will lead to a Moody's-adjusted debt/EBITDA below 6x in 2025 while generating positive free cash flow. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS The ratings could be upgraded if (i) the company's Moody's-adjusted Debt/EBITDA is sustainably below 5x; and (ii) the company's Moody's-adjusted EBITA/Interest Expense is sustainably above 1.75x; and (iii) the company generates sustainably positive free cash flow; and (iv) improves liquidity from current levels. Conversely, the ratings could be downgraded if (i) operating performance fails to improve from current levels, resulting in Moody's-adjusted Debt/EBITDA substantially higher than 6.5x; or (ii) Moody's-adjusted EBITA/Interest Expenses falls sustainably below 1.0x; or (iii) free cash flow stays negative beyond 2024; or (iv) volumes of reclaimed HFC no longer meet the eligibility criteria for voluntary carbon offsets; or (v) liquidity deteriorates; or (vi) the company undertakes debt-financed acquisitions or distributions to shareholders. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Distribution and Supply Chain Services published in February 2023. COMPANY PROFILE Headquartered in the UK, A-Gas is a leading distributor of refrigerant gases with a focus on a number of global markets (including US, Europe and Australia). Alongside providing re-packed virgin gas to the market, the company has a large presence in the recovery and reclaim of previously used high-GWP (Global Warming Potential) refrigerant gases which are exempt of regulatory quotas. Additionally, A-Gas is also able to generate carbon credits from various activities including the destruction of ozone depleting substances (ODS) and high-GWP HFC reclamation, which it places on various voluntary and compliance carbon credits market. TPG holds a controlling stake in A-Gas, while KKR is a minority shareholder. In 2023 the company generated revenue of GBP363 million and Company-reported EBITDA of GBP84 million. ASHTON BESPOKE: KRE Corporate Named as Joint Administrators ----------------------------------------------------------- Ashton Bespoke Limited was placed in administration proceedings in the Royal Court of Justice, Court Number: CR-2024-006171, and Chris Errington and Paul Ellison of KRE Corporate Recovery Limited were appointed as administrators on Oct. 17, 2024. Ashton Bespoke manufactures kitchen furniture. Its registered office is at c/o KRE Corporate Recovery Ltd, Unit 8, The Aquarium, 1-7 King Street, Reading, RG1 2AN. Its principal trading address is at The Old Piggery, South Harting, Petersfield, Hampshire, GU31 5QG. The administrators can be reached at: Chris Errington Paul Ellison KRE Corporate Recovery Limited Unit 8, The Aquarium, 1-7 King Street Reading, RG1 2AN For further information, contact: The Joint Administrators E-mail: info@krecr.co.uk Tel: 01189 479090 Alternative contact: Kelly Rumsam CONSTELLATION AUTOMOTIVE: GBP325MM Bank Debt Trades at 25% Discount ------------------------------------------------------------------- Participations in a syndicated loan under which Constellation Automotive Ltd is a borrower were trading in the secondary market around 74.6 cents-on-the-dollar during the week ended Friday, Oct. 18, 2024, according to Bloomberg's Evaluated Pricing service data. The GBP325 million Term loan facility is scheduled to mature on July 16, 2029. The amount is fully drawn and outstanding. Constellation Automotive Group Limited offers digital used car marketplace. The Company offers used passenger cars, utility vehicles, and trucks, as well as provides parts and accessories, repairs and maintenance, finance, and insurance services. The Company's country of domicile is the United Kingdom. HAYNES AND SONS: JT Maxwell Named as Joint Administrators --------------------------------------------------------- Haynes and Sons Contracting Ltd was placed in administration proceedings in the High Court Of Justice Business & Property Courts of England & Wales Insolvency & Companies List, Court Number: CR-2024-006106, and Andrew Ryder of JT Maxwell Limited was appointed as administrators on Oct. 15, 2024. Haynes And Sons constructs domestic buildings. Its registered office and principal trading address is at 1 Croxford Gardens, Kidlington, England, OX5 1XB. The joint administrators can be reached at: Andrew Ryder JT Maxwell Limited Unit 1 Lagan House 1 Sackville Street, Lisbur Co Antrim, BT27 4AB For further information, contact: Louise McLarnon Email: corporate@jtmaxwell.co.uk Tel No: 02892 448 110 HBS GROUP: RSM Restructuring Named as Joint Administrators ---------------------------------------------------------- HBS Group Southern LTD was placed in administration proceedings in the High Court of Justice, Business & Property Courts of England & Wales, Insolvency & Companies List (ChD), Court Number: CR-2024-005826, and Glen Carter and Damian Webb of RSM UK Restructuring Advisory LLP were appointed as administrators on Oct. 16, 2024. HBS Group engages in plumbing, heat and air-conditioning installation. Its registered office is at HBS House, Unit 9, Solent Way, Whiteley, Hampshire, PO15 7FE. Its principal trading address is at HBS House, Unit 9, Solent Way, Whiteley, Hampshire, PO15 7FE. The joint administrators can be reached at: Glen Carter RSM UK Restructuring Advisory LLP Highfield Court, Tollgate Chandlers Ford, Eastleigh SO53 3TY -- and -- Damian Webb RSM UK Restructuring Advisory LLP 25 Farringdon Street, London EC4A 4AB Correspondence address & contact details of case manager: Nick Talbot RSM Restructuring Advisory LLP RSM UK Restructuring Advisory LLP 2nd Floor, 1 The Square Temple Quay, Bristol BS1 6DG Tel No: 0117 945 2000 Further Details Contact: Glen Carter Email: restructuring.southampton@rsmuk.com Tel No: 023 8064 6464 -- and -- Damian Webb Email: restructuring.london.core@rsmuk.com Tel No: 020 3201 8000 JOHN FLORENCE: Parker Andrews Named as Joint Administrators ----------------------------------------------------------- John Florence Limited was placed into administration proceedings in the High Court of Justice, Court Number: CR-2024-005841, and Grace Jones and David Perkins of Parker Andrews Limited were appointed as administrators on Oct. 15, 2024. John Florence Limited engages in human health activities. Its registered office is at Marine House, 151 Western Road, Haywards Heath, RH16 3LH to be changed to C/O Parker Andrews Ltd, 5th Floor, The Union Building, 51-59 Rose Lane, Norwich, Norfolk, NR1 1BY. Its principal trading address is at Homecare Business Centre, Foundry Lane, Lewes, BN7 2AS. The joint administrators can be reached at: Grace Jones David Perkins Parker Andrews Limited 5th Floor, The Union Building 51-59 Rose Lane, Norwich NR1 1BY For further information, contact: Megan Swann Email: Megan.Swann@parkerandrews.co.uk Tel No: 01603 284284 PIERPONT BTL 2024-1: Fitch Assigns BB(EXP)sf Rating on Two Tranches ------------------------------------------------------------------- Fitch Ratings has assigned Pierpont BTL 2024-1 PLC (Pierpont 2024-1) expected ratings. The assignment of final ratings is contingent on the receipt of final documents conforming to information already reviewed. Entity/Debt Rating ----------- ------ Pierpont BTL 2024-1 Class A LT AAA(EXP)sf Expected Rating Class B LT AA-(EXP)sf Expected Rating Class C LT A(EXP)sf Expected Rating Class D LT BBB+(EXP)sf Expected Rating Class E LT BB(EXP)sf Expected Rating Class X LT BB(EXP)sf Expected Rating Transaction Summary Pierpont 2024-1 is a securitisation of buy-to-let (BTL) mortgages originated in England, Wales and Scotland by LendInvest BTL Limited (LendInvest), and MT Finance (MTF), which entered the BTL mortgage market in 2017 and 2022, respectively. LendInvest and MTF are the named servicers for their respective sub-pools (39.4% MTF and 60.6% LendInvest) with servicing activities delegated to Pepper (UK) Limited. KEY RATING DRIVERS Prime BTL Underwriting: LendInvest and MTF's lending policies are in line with prime BTL lenders. All loans require a full valuation and loan-to-value (LTV) and interest cover ratio (ICR) tests are applied for underwriting. LendInvest excludes borrowers with adverse credit while MT Finance permits some adverse credit. The provisional pool is clear of arrears. Fitch has assigned an originator adjustment of 1.1x to loans originated by MT Finance to account for the limited performance data history in BTL origination. Specialist Properties: Around 40% of the properties (by current balance) are classed as houses of multiple occupation (HMOs) or multi-unit freehold blocks (MUFBs). HMOs in particular are generally higher yielding and require active management, and both LendInvest and MTF require landlords to have a minimum of 12 months experience when advancing against these properties. The yield generated supports the Fitch-calculated ICR, as well as excess spread availability in the transaction. Properties classed as HMOs or MUFBs attract a higher foreclosed sale adjustment discount in Fitch's asset analysis, which affects the weighted average (WA) recovery rate (RR) calculation. Fixed Hedging Schedule: The issuer will enter into a swap at closing to mitigate the interest rate risk arising from fixed-rate mortgage loans prior to their reversion date. The swap notional will be based on a predefined schedule assuming a constant prepayment rate (CPR) based on historical observations of borrower prepayment behavior on comparable mortgage products. If loans prepay ahead of the schedule or default, the issuer will be over-hedged. The excess hedging is beneficial to the issuer in a rising interest-rate scenario and detrimental when interest rates are falling. No Product Switches Permitted: No product switches are allowed to be retained in the pool and will be repurchased. This mitigates the potential for pool migration towards lower-yielding assets and the need for additional hedging. Fixed Loan Reversions Impact CPR: The majority of fixed-rate loans in the provisional pool have a tenor of five years and the reversion dates are concentrated in 2029. Consequently, Fitch expects prepayment rates to remain low post-closing, particularly considering the high early repayment charges that borrowers face within the first few years from origination. This will help limit potential excess spread compression and the risk of over-hedging arising from high CPR in the early years of the transaction. As a result, Fitch has considered alternative high CPR assumptions for the first five years of the transaction's life compared with the standard assumptions. In a sample of UK RMBS transactions, Fitch has observed that prepayment rates tend to follow a portfolio reversion schedule. This formed the basis to derive the alternative assumptions that Fitch has run in the cash flow analysis. The criteria variation results in a multi-notch difference for all notes compared with the model-implied ratings when using the standard high CPR assumptions. Unrated Representations and Warranties Provider: LendInvest and MT Finance are unrated by Fitch and their ability to make substantial repurchases from the pool in the event of a material breach of representations and warranties (R&W) is uncertain. This is mitigated by the materially clean re-underwriting and agreed-upon procedures reports, which make a significant breach of R&W a sufficiently remote risk. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade The transaction's performance may be affected by changes in market conditions and the economic environment. Weakening economic performance is strongly correlated to increasing levels of delinquencies and defaults that could reduce credit enhancement available to the notes. In addition, unexpected declines in recoveries could result in lower net proceeds, which may make certain notes susceptible to potential negative rating action depending on the extent of the decline in recoveries. Fitch conducts sensitivity analyses by stressing a transaction's FF and RR assumptions. For example, a 15% WA foreclosure frequency (FF) increase and 15% WARR decrease would result in a model-implied downgrade of up to one notch for the class A and D notes and two notches for the class B, C, E, and X 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 credit enhancement and consideration for potential upgrades. Fitch tested an additional rating sensitivity scenario by applying a decrease in the WAFF of 15% and an increase in the WARR of 15%, implying upgrades up to two notches for the class B, C, D and X notes, and one notch for the the class E notes. The class A notes are already rated 'AAAsf', the highest rating on Fitch's scale, and cannot be upgraded. CRITERIA VARIATION Fitch applied a criteria variation to the core CPR assumptions in 'high' stresses contained in the UK RMBS Criteria. This is based on historical data observed that suggest prepayment rates may remain low until a loan approaches the contractual reversion rate. As a result, Fitch amended the CPR assumptions in year one to five of its cash flow modelling projections. The result is a multi-notch impact on the class A to E notes and class X notes, which has formed the basis of Fitch's rating assignment. 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 Pierpont BTL 2024-1 PLC 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. 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. 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. SAGA PLC: Moody's Lowers CFR to B3 & Alters Outlook to Stable ------------------------------------------------------------- Moody's Ratings has downgraded Saga Plc's corporate family rating and backed senior unsecured debt ratings to B3 from B2 and the probability of default rating to B3-PD from B2-PD. The outlook has changed to stable from negative. RATINGS RATIONALE The downgrade reflects Saga's constrained liquidity and material refinancing risk over the next 12 to 18 months. The recent announcement concerning the group's planned disposal of its insurance underwriting business, Acromas Insurance Company Limited (AICL) to, and entry into an affinity partnership for motor and home insurance with, ageas SA/NV (Ageas) is unlikely to generate enough cash to significantly alleviate these risks over the shorter term. The transaction also carries some execution risk as it is not currently signed and the sale of AICL is subject to regulatory approval. Although Saga has reduced its leverage and increased its underlying profitability over the past 12 months, liquidity remains relatively tight. The company had GBP86 million in available cash at July 31, 2024, which was supported by a GBP75 million drawdown on a loan from its chairman. There is uncertainty surrounding Saga's ability to repay this loan, which matures in April 2026, ahead of its GBP250 million bond, due in July 2026. This increases the risk of a potential amend-and-extend of the bond that Moody's may view as a distressed exchange. The cash generated by the recently announced transaction with Ageas would only partially alleviate this liquidity pressure. The planned sale of Saga's underwriting entity, Acromas Insurance Company Limited, to Ageas is expected to generate around GBP50 million of cash net of closing adjustments in the first half of 2025. On go-live of the planned affinity partnership with Ageas, expected by the end of 2025, Saga will receive an additional GBP80 million. However, this is expected to be fully consumed by the unwind of negative working capital in the early months of the broking business transitioning to an affinity model and hence will not be available to support repayment of the loan from Saga's chairman. In total the group has GBP770 million of debt. As well as the outstanding bond of GBP250 million and drawn loan of GBP75 million from its chairman, the group has access to an undrawn GBP50 million revolving credit facility, due March 2026, and a further GBP10 million on the facility with its chairman. Ship debt amounts to GBP376 million, due in 2031 and 2032. More positively, Saga's underlying performance has improved significantly over the past 12 months, driven by strong trading in its cruise and travel businesses and gradual recovery in its insurance underwriting business, which Moody's believe to be sustainable. However, insurance broking continue to face challenges, which Moody's expect to persist for the next 12-18 months, exacerbated by the sale of three-year fixed price contracts. While the group's cash generation has been solid, a significant proportion is consumed by the roughly GBP60 million annual amortization of its ship debt. Saga came under pressure during the pandemic due to the suspension of its cruise and travel operations which lowered EBITDA, increasing the group's leverage. More recently, regulatory changes and inflation have impacted the group's insurance businesses. Outlook The stable outlook reflects Moody's expectation that the group's improving performance and cash generation will support its near-term liquidity requirements. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS The following factors could lead to an upgrade: (i) successful refinancing of the group's coming maturities in 2026 or execution of a transaction that would generate material cash to pay the loan to its chairman; (ii) successful execution of the planned transaction with Ageas combined with strong cash generation to form a meaningful liquidity buffer ahead of 2026 maturities. The following factors could lead to a downgrade: (i) evidence of inability to repay the loan to its chairman in cash or difficulty in refinancing its 2026 bond on good terms for creditors; (ii) material deterioration in its earnings and leverage. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Insurance Brokers and Service Companies published in February 2024. SEVENTYNINE LIGHTING: Forvis Mazars Named as Joint Administrators ----------------------------------------------------------------- Seventynine Lighting Limited was placed in administration proceedings in the High Court of Justice Business and Property Courts in Bristol, Court Number: CR-2024-000099, and Mark Boughey and Rebecca Jane Dacre of Forvis Mazars LLP were appointed as administrators on Oct. 14, 2024. Seventynine Lighting is a lighting sub-contractor. Its registered office is at 1 Court Mews, London Road, Charlton Kings, Cheltenham, GL52 6HS. Its principal trading address is at Victoria House, 1 Gloucester Road, Cheltenham, GL51 8LN. The joint administrators can be reached at: Mark Boughey Forvis Mazars LLP 90 Victoria Street, Bristol BS1 6DP -- and -- Rebecca Jane Dacre Forvis Mazars LLP The Pinnacle 160 Midsummer Boulevard Milton Keynes, MK9 1FF For further information, contact: The Joint Administrators Tel No: 0117 928 1700 Alternative contact: Emma Dyer ********* S U B S C R I P T I O N I N F O R M A T I O N Troubled Company Reporter-Europe is a daily newsletter co- published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA. Marites O. Claro, Rousel Elaine T. Fernandez, Joy A. Agravante, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman, Editors. Copyright 2024. All rights reserved. ISSN 1529-2754. 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