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European Corporate Securitizations: Assessing The Credit Effects Of COVID-19


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European Corporate Securitizations: Assessing The Credit Effects Of COVID-19

S&P Global Ratings expects the COVID-19 pandemic to result in a material negative turnover impact for many U.K. whole business securitization (WBS) issuers. The global response to the virus has included mandatory business closures, reductions in maximum permitted occupancies, and encouraged social distancing. In the U.K., a mandatory closure of all public houses (pubs), restaurants, cafes, and other non-essential businesses came into effect on March 22, 2020, with three-week-long restrictions put in place starting the evening of March 23. That said, it is currently difficult to quantify the full impact on U.K. WBS transactions, not only because most issuers have not yet released quarterly results reflecting the effect of the pandemic, but also because mandatory and voluntary restrictions on social congregation and the operation of noncritical businesses continue to be expanded and implemented in real time.

Though it is too early to measure the impact of COVID-19 on transaction cash flows, we have identified transactions that, in our view, will be directly affected. These include those with exposure to the pub sector (Mitchells & Butlers Finance PLC, Greene King Finance PLC, Marston’s Issuer PLC, Spirit Issuer PLC, and Unique Pub Finance PLC), holiday accommodation (Center Parcs – CPUK Finance Ltd.), and sporting events (Arsenal Securities PLC). As we develop better clarity on the expected size and duration of reductions in transactions' securitized net cash flows, we will evaluate whether adjustments to our base-case and downside projections are appropriate. Changes in these projections could have an impact on our debt service coverage ratio (DSCR) estimates, which, in turn, could affect ratings on WBS notes. It is also possible that if longer-term effects emerge that reshape the economy or industry, we may revise our assessment of a company's business risk profile, which could also result in rating changes.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.

As we receive more issuer-specific and industry-level data, and learn more about what actions issuers will be taking to mitigate the impact on turnover, we will assess our rated WBS transactions to determine whether rating reviews are warranted. We expect that companies will take immediate and decisive steps in order to manage costs and preserve cash flow. The extent to which each company is able to conserve cash may also depend on the extent to which they adjust their dividend policy, reduce discretionary capital investment, or benefit from the U.K. government's announced policies meant to provide relief to companies in the form of a 12-month business rates holiday, as well as the deferral of corporation tax payments, holiday on value-added tax (VAT), national insurance, and payroll tax payments. Many firms hold comprehensive insurance policies, but in many cases an insurance policy may not cover the impact of COVID-19 on the business. We will continue to monitor the transactions closely and provide additional transparency on our outlook as we receive further information.

Pub Securitizations

Transactions that are backed by operating cash flows from pub companies (pubcos) will be particularly hard hit by the mandatory restrictions imposed by the U.K. government, which prohibit dine-in business and only permit take-away sales and deliveries. For the managed-pub sector, it is likely that delivery will not grow meaningfully enough to offset the loss of revenue due to the cessation of dine-in. As a result, we expect a material reduction in turnover across the pubcos that we rate. For strictly wet-led (leased and tenanted) estates, the ability to generate revenue from delivery is generally very low and the loss of revenue can be expected to be nearly total while the government's restrictions are in place.

The ability of the borrowers to withstand the pending liquidity stress will come down to their current level of headroom over their financial covenants and readily available sources of liquidity.

The following charts show the historical levels of headroom above both the default covenant and the restricted payment condition for each of the pub transactions. The marked improvement in the headroom for Spirit is due to a series of early redemptions that have eliminated any principal payments over the near term. Once principal comes due for the outstanding debt, the headroom will return to more normal levels. Likewise, the headroom observed for Unique is also attributable to early redemptions, but is more an artefact of how the DSCR is documented in the transaction (see "Buybacks, DSCR, And Covenants" in "Transaction Update: Unique Pub Finance Co. PLC," published on Nov. 22, 2019).

Chart 1


Chart 2


Additional sources of liquidity available for each transaction include cash held in transactions accounts, reserve funds held at the borrower level, and liquidity facilities available to the issuer. Some of the cash is held in disposal proceeds accounts, which we generally do not give credit to as it may be used for purposes such as the acquisition of new assets. However, we expect that in times of liquidity stress a borrower would be likely to use the funds to service its debts. The use of reserve funds is restricted to servicing the issuer borrower facilities, while the liquidity facility is available to the issuer in order to service the notes and the combination of the two is sized to cover 18 months of peak debt service. For Unique, the borrower in the transactions benefits from a cash reserve with a target balance of £65 million, which is exclusively available to cover its senior fees and expenses and service the loans, and a £152 million liquidity facility available to the issuer.

Chart 3


Though we cannot yet say what the ratings impact of weakened short-term cash flow collections may be, we can highlight the permanent all-in cash flow reduction that we believe each transaction can withstand before either our anchor, a key driver of our outstanding ratings, may come under pressure or the borrower may begin to need to draw funds either in its cash accounts or other forms of liquidity support. We have assessed the potential for both by running a break-even analysis.

Under our break-even cash flow analysis we have assumed hypothetical reductions in cash flow available for debt service (CFADS) beginning in the second quarter of 2020, when we expect the full effects of the pandemic will take hold. While we believe COVID-19 related cash flow reductions are provisional, the expected duration of the COVID-19 related cash flow reductions is not yet clear. Therefore, we ran scenarios assuming that the reduction spanned anywhere from one to four quarters, after which CFADS returned to normal levels. While it is possible that near-term stress may result in ratings migration, we do not currently believe transactions will face payment shortfalls after considering the current levels of available liquidity.

Table 1 shows the outcomes of our break-even analysis. The outcomes of Stress 1 focus on the level of decline in CFADS that may put our anchor related to the class A notes under pressure, while Stress 2 is purely focused on the potential need to access available liquidity. Both Marston's and Mitchells & Butlers have the lowest levels of headroom over their default covenants and restricted payment conditions, and we estimate that they can withstand the least amount of strain on their cash flows. For both Spirit and Unique, as discussed above, due to their prepayments and early redemptions, we do not expect much of an impact on either transaction due to any near-term stress stemming from COVID-19. Greene King appears to be the best positioned to withstand any liquidity stress.

Table 1

Liquidity Stresses
Stress 1 Stress 2
Issuer Estate composition Business risk profile Class A rating Decline in CFADS over Q2 2020 associated with a change in anchor Decline in CFADS associated with a need to access available liquidity sources
Mitchells & Butlers Finance PLC Managed Fair A- (sf) 10% 80% over two quarters or 60% over three quarters
Greene King Finance PLC Managed and Tenanted Fair BBB (sf) 60% 70% over three quarters or 50% over four quarters
Marston's Issuer PLC Managed and Tenanted Fair BB+ (sf) 10% 50% over one quarter or 30% over two quarters
Spirit Issuer PLC Managed and Tenanted Fair BB+ N.M.* N.M.*
Unique Pub Finance Co. PLC (The) Tenanted Fair BB+ (sf) N.M.* 80% over three quarters or 70% over four quarters
*The current anchor is associated with a time period that is beyond the period of stress we are considering for the COVID-19 pandemic. N.M.--Not meaningful. CFADS—Cash flow available for debt service

CPUK Finance

On March 17, 2020, Center Parcs announced that it would be closing its five U.K. holiday villages from March 20, to April 16, 2020. The Center Parcs group is a network of five holiday villages, located throughout the U.K. These include Sherwood Forest in Nottinghamshire, Longleat Forest in Wiltshire, Elveden Forest in Suffolk, Whinfell Forest in Cumbria, and Woburn Forest in Bedfordshire. These five holiday villages represent the entirety of the assets backing the outstanding notes that we rate. Center Parcs's anticipated monthly cash requirement will depend on the level of guest refunds and the execution of the cash preservation measures outlined earlier.

In order to mitigate the potential impact on revenue, Center Parcs is contacting its guests who have a break booked during the closure period to discuss the options available to them. Under their terms and conditions, if Center Parcs cancels breaks they may offer guests a date change or a refund. Center Parcs is offering a financial incentive of £100 per accommodation unit for guests who opt for a date change rather than a full refund.

Center Parcs also outlined measures that it would take in order to manage costs and preserve cash flow, namely:

  • Cash management procedures;
  • A 12-month business rates holiday, where Center Parcs' annual rates cost is approximately £24 million payable monthly;
  • Deferral of corporation tax payments, which they estimate will amount to £3 million over the next three months; and
  • An agreed three-month holiday on corporation tax payments, a holiday on VAT, national insurance, and payroll tax payments. They expect the payment holidays will preserve £12 million and they will consider applying for the government's "time to pay" initiative for a further three-month deferral of payments.

The transaction blends a corporate securitization of the U.K. operating business of the short-break holiday village operator Center Parcs (Holdings 1) Ltd. (CPH), the borrower, with a subordinated high-yield issuance (the class B3-Dfrd and B4-Dfrd notes). It originally closed in February 2012 and has been tapped several times since, most recently in December 2018.

The class A notes have a soft-bullet maturity, where only interest is due before an expected maturity date (EMD) and cash sweep amortization thereafter. As a result, the only debt service obligation between now and February 2024 (the EMD of the class A2 notes) are interest payments.

The results of our break-even analysis show that a 20% reduction in ticket receipts over a six-month period may put our base-case anchor under pressure, while it would take a 70% reduction over a one-year period before the transaction may need to access liquidity lines in order to service its debts. However, we estimate that the magnitude of that need should be easily covered by the facilities currently in place. Center Parcs had £35 million of cash on its balance sheet, as of March 20, 2020, and the issuer benefits from liquidity commitments that total £90 million. Center Parcs' has stated that their insurance policy does not cover the current impact to its business. Brookfield Asset Management's BSREP II fund holds a £750 million investment and has significant uncalled capital available. It has stated its intention to deploy its uncalled capital to support its investment in Center Parcs, if required.

Arsenal Securities

On March 19, 2020, the English Premier League (EPL) held a meeting where it was decided to extend the suspension of play until April 30. At the time of the suspension, the Football Association (FA) made the decision to extend the current season indefinitely, while the UEFA postponed the EURO 2020 competition, which opened a window to allow for the completion of the current season should play resume.

There are many factors that will, in concert, shape the financial impact on Arsenal Football Club (AFC) and the facts do not provide much certainty as to how events will unfold. For AFC, match-day revenues accounted for about 25% of the club's total football revenue in the 2017/18 season, with broadcast and commercial representing 47% and 28% of the total, respectively, based on the club's most recent figures.

At this point it is unclear how broadcasters will respond to either the suspension in play or, in the extreme, to a cancellation of the remaining season, which will ultimately determine the impact on broadcasting income. Should broadcasters seek compensation, it may have a dramatic impact on the financial performance of any club within the EPL. Commercial contracts may be better insulated given that they are bilateral arrangements between a club and a sponsor and contain fixed components that are not tied to on-pitch performance. However, it is unclear how the variable performance-based revenues will be affected. As for match-day revenues, the most likely scenario is that play will resume once the current stoppage is lifted and both the season and box-office tickets will be otherwise unaffected. In addition, AFC does have business disruption insurance to cover any loss in match-day revenues, but it is unclear how the terms and conditions of that policy marry with a disruption on the scale and of the nature of the current COVID-19 pandemic. It is to be determined if this will be viewed as a force majeure under English law.

Arsenal Securities is a corporate securitization backed primarily by revenue generated from ticket sales for AFC's football matches played at the Emirates Stadium in London. The cash flows that support the notes are not related to the EBITDA or cash flow available for debt of Arsenal Holdings or Arsenal Emirates Stadium Ltd. (AESL), the borrower, but to AFC's gross ticket receipts. As a result, the cash flow generative ability of the stadium is directly tied to the performance of AFC and its ability to continue to maintain its fan base and ticket pricing. There is a contractual obligation for AFC to play all of its home matches at the Emirates Stadium for the entire term of the transaction. The transaction also benefits from AFC's other sources of income and assets, such as land and intellectual property rights, but we did not consider income other than match-day revenues in our analysis.

The transaction is fully amortizing and includes several covenants at the AFC level, whose aim is to reduce the risk of AFC getting into financial difficulty. The breach of any of the covenants will result in a corresponding hard-wired remedy, including the diversion of all transaction cash to the debt-service account. In addition, the transaction is supported by a £20 million liquidity facility and an 18-month debt-service reserve account, while AFC can draw on both a working capital facility (£30 million) and a letter of credit (£40 million) for the funding of player trades.

Given the most likely outcome is that the current season will resume, our view is that the suspension will be a liquidity stress on the club. The results of our break-even analysis show that a 50% reduction in ticket receipts over a six-month period may put our base-case anchor under pressure and that it would take a 90% reduction over a one-year period before there may be a need to access liquidity lines in order for AESL to service its debts. In the latter scenario, we estimate that the magnitude of that need may be easily covered by the facilities currently in place.

Related Research

  • European ABS And RMBS: Assessing The Credit Effects Of COVID-19, March 30, 2020
  • Coronavirus Impact: Key Takeaways From Our Articles, March 27, 2020
  • COVID-19: The Steepening Cost To The Eurozone And U.K. Economies, March 26, 2020
  • European CLOs: Assessing The Credit Effects Of COVID-19, March 25, 2020
  • Global Covered Bonds: Assessing The Credit Effects Of COVID-19, March 25, 2020
  • European CMBS: Assessing The Credit Effects Of COVID-19, March 24, 2020
  • Assessing The Coronavirus-Related Damage To The Global Economy And Credit Quality, March 24, 2020
  • Coronavirus Dramatically Increases Risk For Already Stressed Retail And Restaurant Sectors, March 20, 2020
  • COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
  • Global Credit Conditions: COVID-19’s Darkening Shadow, March 3, 2020
  • Transaction Update: Unique Pub Finance Co. PLC, Nov. 22, 2019
  • Transaction Update: Marston's Issuer PLC, Oct. 31, 2019
  • Transaction Update: Mitchells & Butlers Finance PLC, Oct. 31, 2019
  • Ratings Raised On U.K. Corporate Securitization Arsenal Securities Following Counterparty Upgrade, May 24, 2019
  • Transaction Update: Arsenal Securities PLC, April 25, 2019
  • New Issue: Greene King Finance PLC, Feb. 22, 2019
  • Transaction Update: Spirit Issuer PLC, Dec. 20, 2018
  • New Issue: CPUK Finance Ltd., Nov. 20, 2018

This report does not constitute a rating action.

Primary Credit Analyst:Greg M Koniowka, London (44) 20-7176-1209;

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