b2holding asa€¦ · b2holding asa primary credit analyst: heiko verhaag, cfa, frm, frankfurt (49)...

B2Holding ASA

Primary Credit Analyst:

Heiko Verhaag, CFA, FRM, Frankfurt (49) 69-33-999-215; [email protected]

Secondary Contact:

Michal Selbka, Frankfurt +49 (0) 69-33999-300; [email protected]

Table Of Contents

Credit Highlights

Outlook

Our Base-Case Scenario

Company Description

Business Risk

Financial Risk

Liquidity

Covenant Analysis

Issue Ratings Recovery Analysis

Reconciliation

Ratings Score Snapshot

Related Criteria

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 30, 2020 1

B2Holding ASA

Credit Highlights

Issuer Credit Rating

B+/Negative/--

Overview

Key Strengths Key Risks

Strong geographic diversification with exposure to about 20

European countries and access to a strong nonperforming loans

(NPLs) pipeline.

Narrow focus on purchasing and maximizing collections on distressed

debt portfolios, which implies high reliance on proper pricing of portfolios.

Strong market position in Northern and Central and Eastern Europe. Significant debt-funded growth over recent years.

Tight covenant headroom over 2020, from COVID-19-related delays in

collection.

B2Holding ASA (B2) will suffer from the economic effects of the COVID-19 pandemic. The economic downturn

expected for 2020 will lead to material delays in collection from secured and unsecured debt. Closure of courts in

some countries essentially stops legal collection on secured debt in these markets, while high economic uncertainty

and rising unemployment will lead to lags in unsecured collection.

B2's leverage will rise, but remain among the lowest in the sector. S&P Global Ratings expects B2's leverage will rise to

above 3.2x in 2020, compared with the above 4.0x that we forecast for most peers. We also take into account B2's

financial flexibility. The company has suspended its dividend payment and we believe portfolio acquisitions will be

reduced to a minimum in 2020. This includes forward-flow agreements, which, as we understand, have largely been

renegotiated or put on hold. However, we have limited visibility on the leverage trajectory afterward. Although we

believe that collections will rebound as the economy recovers, we would also expect B2 to consider higher leverage to

pursue profitable portfolio acquisitions beyond our base case if they arise, within the limits of its covenants.

We expect B2's covenant headroom to diminish over 2020. The expected drop in collections and related lower cash

EBITDA will reduce covenant headroom to a minimum under our base case, such that B2 will need to approach its

revolving credit facility (RCF) banks to find a solution should there be more material delays in collection than we

currently expect. This could also constrain B2's investment capacity if markets stabilize and business opportunities

arise. Although we expect RCF banks to remain accommodative, it is less certain in the current economic

environment. Tight covenant headroom, and not leverage, remains the major rating weakness.


Chart 1

Outlook

The negative outlook indicates that as the COVID-19 pandemic spreads across Europe, it will be more difficult to

maintain collection performance. This will strain B2's earnings and liquidity profile over 2020.

Downside scenario

We could lower the rating on B2 in the next 12 months if we were to expect additional delays in secured or

unsecured collections, beyond our base case for 2020 of a 12% drop in collections compared with 2019. This

would further reduce covenant headroom to an extent that could become incompatible with a 'B+' rating.

Upside scenario

We could revise the outlook to stable in the next 12 months if we see a stabilizing macro environment in Europe

that would lead to a pickup in collections, improve liquidity prospects, and give rise to opportunities in purchasing

portfolios. This would also hinge on improving covenant headroom, through increased collections or RCF

renegotiations with banks.


B2Holding ASA

Our Base-Case Scenario

Assumptions Key Metrics

• Cash revenue to decline by about 10% in 2020,

reflecting delays in collection.

• S&P Global Ratings-adjusted cash EBITDA margin

(revenue and EBITDA adjusted for amortization of

debt portfolios) expected at 66% for year-end 2020.

• Gross debt to EBITDA to rise to above 3.2x by

year-end 2020, from 3.0x at year-end 2019.

• Limited portfolio investments of about €130 million

in 2020.

• No dividend payout in 2020.

2019A 2020E 2021E

Debt to EBITDA (x) 3.0 3.3-3.7 >3.1

Debt to EBITDA (x)* 10.8 8.7-9.1 >7.7

EBITDA interest coverage (x) 5.0 4.5-4.7 <4.9

EBITDA interest coverage (x)* 1.4 1.6-1.8 <2.1

*EBITDA excluding the add-back for portfolio

amortization. A-Actual. E--Estimate.

Base-Case Projections

We acknowledge a high degree of forecast uncertainty associated with the length and severity of COVID-19 business

disruptions and their effect on the debt collection industry. We expect B2's operations to be strongly affected by the

COVID-19 pandemic. Our base case for 2020 includes an increase in leverage to above 3.2x from 3.0x in 2019, based

on a double-digit decline in cash revenue as closed courts and weakening credit quality will result in lower collections.

However, we believe limited portfolio purchases should somewhat temper the worst effects of the downturn and help

to preserve cash levels, at least for the short term.

We see growth from own portfolio acquisitions but little benefit from third-party servicing revenue. B2 will continue to

rely on cash collections from its purchased portfolio, while European peers more strongly diversify into third-party

servicing business. Increasing servicing revenue will likely come from joint ventures with external partners.

Company Description

Founded in 2011 and domiciled in Norway, B2 has quickly become a well-established pan-European debt purchaser. It

has expanded through a combination of organic growth and a number of bolt-on acquisitions. B2Holding is the parent

company of a large group of local subsidiaries that are engaged in purchasing debt from vendors and collecting on

these portfolios. Its decentralized management model means that local franchises are usually run under domestic

brands with local management teams. However, the group centralizes certain functions, including its investment office

in Luxembourg, which supports operational consistency. As of Dec. 31, 2019, B2 had Norwegian krone (NOK) 23.8

billion (€2.4 billion) in 120-month estimated remaining collections--the group's estimate of collections over the given

timeframe if it does not purchase any additional debt portfolios.


B2Holding ASA

Business Risk

B2 aims to become an integrated part of the banking value chain with economies of scale in the debt collection

process. The high (more than 50%) share of purchases from forward-flow agreements indicates good integration

already. Our assessment of B2's business risk profile considers the broad geographic diversification of its vendors and

purchased portfolios as a key strength, since this allows B2 to be selective in its capital deployment across markets and

reduces its vulnerability to poor collections in single markets. Nevertheless, we expect that not all markets have

sustainable business potential and that Poland, Finland, and Croatia will still contribute the majority of cash EBITDA in

2020.

The company's strength in geographic breadth is offset by concentrated revenue streams from its purchased loan

portfolios, while fees from servicing third-party portfolios were only 17% in 2019, which is low in comparison with

30%-50% for certain peers. Alongside B2's high growth strategy, we believe its earnings concentration constrains its

creditworthiness. Its business model is susceptible to the debt-portfolio selling behaviors of financial services

companies and corporate vendors as well as aggressive actions by competitors. Although not part of our base-case

scenario, this has the potential to lead to volume declines or heightened market risk through uneconomical pricing of

debt portfolios.

Given B2's difficult experience with collection on secured portfolios, we expect the largest share of future portfolio

acquisitions in the unsecured space. Nevertheless, we also expect further co-investments in secured portfolios that

could somewhat diversify revenue streams. The proportion of unsecured consumer credit in estimated remaining

collections (ERC) was 72% at year-end 2019, which is beneficial in the current economic environment since this

segment has less reliance on the court system. We think that B2's creditworthiness benefits from local management

teams' knowledge in unsecured consumer credit given the fragmented nature of the European NPL markets.

Peer comparisonTable 1

B2Holding ASA--Peer Comparison

B2Holding ASA

Arrow Global Group

PLC

Garfunkelux HOLDCO

2 S.A.

Cabot Financial

Ltd.

Intrum AB

(publ)

Ratings as of June 30, 2020 B+/Negative/-- BB-/Negative/-- B+/Negative/B BB-/Negative/-- BB/Negative/B

(Mil. NOK) --Fiscal year ended Dec. 31, 2019--

Revenue 5,698.8 3,953.6 8,688.5 4,920.2 18,943.4

EBITDA 3,972.7 3,760.6 5,273.1 2,304.1 8,947.1

Funds from operations

(FFO)

3,041.7 3,081.2 3,436.1 1,343.6 6,824.2

Interest expense 801.8 635.2 2,023.0 1,043.2 1,627.0

Cash interest paid 737.1 516.0 1,851.7 960.5 1,368.2

Cash flow from operations 2,872.3 3,774.6 3,401.6 5,105.3 6,014.9

Capital expenditure 3,169.3 14.8 57.5 117.6 7,548.8

Free operating cash flow

(FOCF)

(297.0) 3,759.8 3,344.1 4,987.7 (1,533.8)


B2Holding ASA

Table 1

B2Holding ASA--Peer Comparison (cont.)

Discretionary cash flow

(DCF)

(481.7) 3,491.2 3,344.1 4,987.7 (2,842.8)

Cash and short-term

investments

355.9 1,033.5 1,449.5 0.0 2,701.6

Debt 11,939.1 14,454.0 28,997.4 16,753.7 48,784.4

Equity 4,236.8 2,350.1 1,858.7 3,797.8 23,424.5

Adjusted ratios

EBITDA margin (%) 69.7 95.1 60.7 46.8 47.2

Return on capital (%) 24.3 21.4 15.9 10.4 12.1

EBITDA interest coverage

(x)

5.0 5.9 2.6 2.2 5.5

FFO cash interest coverage

(x)

5.1 7.0 2.9 2.4 6.0

Debt/EBITDA (x) 3.0 3.8 5.5 7.3 5.5

FFO/debt (%) 25.5 21.3 11.8 8.0 14.0

Cash flow from

operations/debt (%)

24.1 26.1 11.7 30.5 12.3

FOCF/debt (%) (2.5) 26.0 11.5 29.8 (3.1)

DCF/debt (%) (4.0) 24.2 11.5 29.8 (5.8)

NOK--Norwegian krone.

Financial Risk

We expect B2 to maintain a less leveraged profile than most of the peer group, with debt to EBITDA of 3x-4x at

year-end 2020. Still, our expectations for debt to EBITDA and EBITDA interest coverage metrics, whether we look at

EBITDA including or excluding the add-back for collections, all show a modest deterioration compared with 2019

levels and our previous forecasts for 2020. We take into account suspended dividend payments and only minimal

portfolio acquisitions in 2020, which we believe will help mitigate constrained collections in the short term. Still, we

recognize there are downside risks to those forecasts, due to the rapidly deteriorating economic situation in many

European countries.

We believe that, on balance and over the cycle, an aggressive financial risk profile score is warranted, instead of

significant (see also our accounting considerations below). This takes into account a variety of metrics like funds from

operations (FFO) to debt, in addition to standard leverage and coverage metrics. That said, there are some supportive

factors, such as B2's debt to tangible equity, which stands at about 3x. The company stands out among its peers as

having material positive tangible equity that provides some balance sheet buffer to unexpected losses. However, we

also recognize some sensitivity to foreign exchange rates, since B2's debt is largely denominated in euros, while its

revenue streams are in multiple currencies.

Our expectations beyond 2020 largely hinge on the strength and the timing of the economic recovery. We generally

expect B2 will maintain its organic growth trajectory and remain committed to its financial policy with a target

leverage ratio of below 3x. This assumption includes moderate portfolio acquisition at levels closer to 2019 (NOK3.1


B2Holding ASA

billion) rather than in previous years (NOK5.9 billion in 2018). Nevertheless, we remain cautious on the trajectory. We

believe the economic recovery could likely result in rising NPL supply and thus favorable purchasing markets. If

purchasing volumes are ramped up beyond our base case, this could lead to spike in leverage.

Accounting

Our calculation of EBITDA for B2, as for other distressed debt purchasers, includes an adjustment to add back

collections applied to principal, or portfolio amortization, which flows through the cash flow statement. This is to

reflect the cash flow associated with collections on distressed receivables, since these collections could be used in

theory for debt repayment. That said, distressed debt purchasers consistently purchase new distressed receivables to

replenish their income-generating asset base and maintain profitability over the cycle. Although they have some

discretion over the timing, this can significantly deplete collections applied to principal and we rate the companies

assuming ongoing activities (that is, not assuming a rapid contraction of activities or a run-off scenario). Therefore, our

EBITDA measure may overstate the true cash available to repay debt. With this in mind, we also consider in our

analysis the impact of the add-back for collections applied to principal. This is also reflected within our financial risk

profile assessment for B2.

Financial summaryTable 2

B2Holding ASA--Financial Summary

--Fiscal year ended Dec. 31--

(Mil. NOK) 2019 2018 2017 2016 2015

Revenue 5,698.8 4,375.8 2,884.7 2,060.6 1,500.5

EBITDA 3,972.7 2,987.4 1,905.4 1,208.3 843.2

Funds from operations (FFO) 3,041.7 2,279.8 1,445.8 961.7 723.9

Interest expense 801.8 617.2 360.7 227.0 114.0

Cash interest paid 737.1 531.9 321.5 186.2 92.8

Cash flow from operations 2,872.3 2,323.6 1,310.6 818.2 603.2

Capital expenditure 3,169.3 5,971.2 4,128.7 2,460.9 1,375.8

Free operating cash flow (FOCF) (297.0) (3,647.5) (2,818.1) (1,642.8) (772.6)

Discretionary cash flow (DCF) (481.7) (3,769.8) (2,873.7) (1,643.0) (772.6)

Cash and short-term investments 355.9 397.7 452.0 217.6 764.7

Gross available cash 355.9 397.7 452.0 217.6 764.7

Debt 11,939.1 11,121.2 6,986.9 3,330.5 2,721.0

Equity 4,236.8 4,355.5 3,148.4 2,424.9 1,671.9

Adjusted ratios

EBITDA margin (%) 69.7 68.3 66.1 58.6 56.2

Return on capital (%) 24.3 22.7 23.3 22.7 21.4

EBITDA interest coverage (x) 5.0 4.8 5.3 5.3 7.4

FFO cash interest coverage (x) 5.1 5.3 5.5 6.2 8.8

Debt/EBITDA (x) 3.0 3.7 3.7 2.8 3.2

FFO/debt (%) 25.5 20.5 20.7 28.9 26.6

Cash flow from operations/debt (%) 24.1 20.9 18.8 24.6 22.2

FOCF/debt (%) (2.5) (32.8) (40.3) (49.3) (28.4)


B2Holding ASA

Table 2

B2Holding ASA--Financial Summary (cont.)

--Fiscal year ended Dec. 31--

(Mil. NOK) 2019 2018 2017 2016 2015

DCF/debt (%) (4.0) (33.9) (41.1) (49.3) (28.4)


Liquidity

We assess B2's liquidity as less than adequate because we expect covenant headroom will diminish over 2020, such

that a decline in EBITDA of less than 10% versus our base case could lead to a covenant breach under the RCF

documentation. This is the main weakness to the rating.

We generally expect B2's RCF banks to remain accommodative and waive covenants if required, as they have done in

the past. Nevertheless, we see a risk that the current economic environment and pressure on banks' asset quality could

constrain their supportiveness and limit availability of the RCF in the future. For that reason, we also exclude unused

capacity of B2's €510 million RCF from our quantitative liquidity analysis.

Further delays in collection beyond our base case could raise doubts on RCF availability and B2's general liquidity

position. This could also constrain B2's future investment capacity if markets stabilize and business opportunities arise.

Although B2 is a nonoperating holding company and does not generate any cash flows, we do not factor structural

subordination into our rating. This is because we do not perceive any material barriers to cash flows within the group

or any significant issues regarding the transfer of capital between the parent company and its subsidiaries.

Principal Liquidity Sources

Principal liquidity sources over the 12 months from April 1, 2020, include:

• Cash balance of NOK396 million, including the unrestricted cash balance and short-term deposits.

• Cash FFO of NOK2,650 million.

Principal Liquidity Uses

Principal liquidity uses for the same period include:

• Short-term debt maturities of about NOK1.5 billion (Bond B2H01 due in December 2020).

• Working capital outflows of about NOK100 million.

• Portfolio investments and other capital expenditure of about NOK1,500 million, reflecting the uncertainties

associated with the current market environment.

Debt maturities

B2's weighted-average debt maturity was 3.1 years as of Dec. 31, 2019.


B2Holding ASA

Chart 2

Covenant Analysis

B2 has to comply with maintenance covenants under its bond and RCF documentation, updated in February 2020. B2

should remain compliant with all covenants under our base case, but we see rapidly diminishing headroom, especially

in regards to the more conservative RCF covenants.

RCF covenants

• Equity ratio (greater than 25.0%; 25.2% in December 2019)*

• Total loan to value ratio (at less than 75%; 74.2% in December 2019)*

*Can be set aside in one financial quarter until May 2022.

Bond covenants

• Net interest coverage ratio (greater than 4.0x; 5.1x in December 2019)

• Leverage ratio (at less than 4.0x; 2.9x in December 2019)

• Secured loan to value ratio (at less than 65%; 17% in December 2019)


B2Holding ASA

Issue Ratings Recovery Analysis

Key Analytical Factors

• The issue rating on B2's senior unsecured bond due in 2024 is 'B+', with a recovery rating of '3', indicating our

expectation of meaningful recovery (50%-70%; rounded estimate: 60%).

• We treat the multi-currency senior secured RCF, with a current volume of €510 million, as priority debt. We assume

that the RCF will be 85% drawn.

• In our simulated default scenario, we contemplate a default in 2024, reflecting a significant decline in cash flow

because of lost clients, difficult collection conditions, or greater competitive pressures, leading to the mispricing of

portfolio purchases.

• We use a discrete asset-valuation approach, which is in line with other debt purchasers that have concentrated

revenue from own-debt collections.

• We take the portfolio size as of March 31, 2020, assume that 70% of the undrawn RCF balance is used for portfolio

purchases, and apply a 25% haircut to the total expected book value as an estimate of resale value in a liquidation.

• We assume the company's portfolio of receivables would find a potential acquirer, albeit with a 25% haircut to the

carrying value, which we note is about 46% of B2's estimated remaining collections.

The discrete asset valuation results in a net asset value of €1,059 million (NOK12,116 million), from which we deduct a

5% administration expense to arrive at the net enterprise value.

Simulated Default Assumptions

• Year of default: 2024

• Jurisdiction: Norway

Simplified Waterfall

• Net enterprise value available to creditors (after 5% administrative costs): €1,006 million (NOK11,510 million)

• Senior secured RCF debt claims: €450 million* (NOK5,144 million)

• Collateral value available to unsecured debt: €557 million (NOK6,366 million)

• Senior unsecured debt claims: €922 million* (NOK10,540 million)

• Recovery expectation: 50%-70% (rounded estimate: 60%)

*All debt amounts include six months of prepetition interest.

Reconciliation


B2Holding ASA

Table 3

B2Holding ASA--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts

--Fiscal year ended Dec. 31, 2019--

B2Holding ASA reported amount

(Mil. NOK) Debt

Shareholders'

equity Revenue EBITDA

Operating

income

S&P Global Ratings'

adjusted EBITDA

11,735.2 4,236.2 2,809.7 1,092.8 958.6 3,972.7

S&P Global Ratings' adjustments

Cash taxes paid -- -- -- -- -- (193.9)

Cash interest paid -- -- -- -- -- (737.1)

Reported lease liabilities 141.3 -- -- -- -- --

Dividends received from equity

investments

-- -- -- 64.1 -- --

Income (expense) of

unconsolidated companies

-- -- -- (64.1) -- --

Nonoperating income (expense) -- -- -- -- 3.1 --

Noncontrolling interest/minority

interest

-- 0.6 -- -- -- --

Debt: Workers

compensation/self insurance

4.2 -- -- -- -- --

Debt: Contingent considerations 58.6 -- -- -- -- --

Revenue: Other -- -- 2,889.1 2,889.1 2,889.1 --

EBITDA: Fair value changes of

contingent consideration

-- -- -- (9.2) (9.2) --

Total adjustments 204.0 0.6 2,889.1 2,879.9 2,883.0 (931.0)

S&P Global Ratings' adjusted amounts

Debt Equity Revenue EBITDA EBIT

Funds from

operations

Adjusted 11,939.1 4,236.8 5,698.8 3,972.7 3,841.6 3,041.7


Consistent with other debt purchasers that we rate, we add back to EBITDA the amortization of portfolio investments

as a material noncash item. We do not deduct any surplus cash to derive our adjusted debt, since we think its balance

would not be immediately available to service debt due to the large cash level volatility. All other adjustments relate to

our standard adjustments.

Ratings Score Snapshot

Issuer Credit Rating: B+/Negative/--

Business risk: Fair

• Country risk: Intermediate

• Industry risk: Moderately high


B2Holding ASA

• Competitive position: Fair

Financial risk: Aggressive

• Cash flow/Leverage: Aggressive

Anchor: bb-

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)

• Capital structure: Neutral (no impact)

• Liquidity: Less than adequate (-1)

• Financial policy: Neutral (no impact)

• Management and governance: Fair (no impact)

• Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile: b+

Related Criteria

• General Criteria: Group Rating Methodology, July 1, 2019

• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

• Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016

• Criteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016

• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate

Issuers, Dec. 16, 2014

• Criteria | Financial Institutions | General: Issue Credit Rating Methodology For Nonbank Financial Institutions And

Nonbank Financial Services Companies, Dec. 9, 2014

• Criteria | Financial Institutions | Finance Companies: Key Credit Factors For Financial Services Finance

Companies, Dec. 9, 2014

• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Ratings Detail (As Of June 30, 2020)*

B2Holding ASA

Issuer Credit Rating B+/Negative/--


B2Holding ASA

Ratings Detail (As Of June 30, 2020)*(cont.)

Senior Unsecured B+

Issuer Credit Ratings History

15-Apr-2020 B+/Negative/--

02-May-2018 BB-/Stable/--

Sovereign Rating

Norway AAA/Stable/A-1+

*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable

across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and

debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.


B2Holding ASA


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