Fitch Assigns CPUK's Refinancing Notes 'B', Affirms Existing Notes
The transaction is a partial refinancing of the CPUK Finance Ltd whole business securitisation (WBS) of five purpose-built holiday villages in the UK. The GBP560m class B2 notes fully refinance the existing GBP280m class B notes, and partially fund the acquisition of Center Parcs by Brookfield. The issue increases CPUK Finance's outstanding principal by GBP280m to GBP1,490m.
Fitch calculates that financial year ended April 2015 EBITDA pro forma leverage, adjusted for the B2 issue, is 8.0x versus 6.5x prior to the partial refinancing, and 7.6x at transaction close in 2012.
The Stable Outlook reflects Fitch's expectation that the relatively good quality estate and proactive, experienced management will continue to deliver steady performance over the medium term.
SUMMARY OF CREDIT
The holiday villages are Sherwood Forest in Nottinghamshire; Longleat Forest in Wiltshire; Elveden Forest in Suffolk, Whinfell Forest in Cumbria and Woburn Forest in Bedfordshire.
PARTIAL REFINANCING ANALYSIS
The partially refinanced structure has been compared to the pre-class B refinancing and original (closed in 2012) transaction structures primarily through synthetic (due to the lack of scheduled amortisation) debt service coverage ratio (DSCR) metrics, deleveraging profile and ultimate forecast repayment date in addition to stress testing via breakeven analysis.
As per our original analysis in 2012, Fitch assumes under its base case that the class A and B notes are not refinanced at expected maturity. We assume cash sweep amortisation after that. Notably, the class A2, A3 and A4 notes also benefit from a full cash lock-up one year prior to their expected maturity. However, this feature falls away from the class A3 and A4 notes if there is a qualifying IPO and Fitch has therefore only given credit to the class A2 lock-up in its base case.
The increase in debt results in the synthetic DSCR metrics being weaker than under the structure pre-refinancing (1.56x vs. 1.77x), however, they are only marginally weaker than under the original structure. In terms of deleveraging, the class B notes also demonstrate a weaker profile than under the pre-refinancing structure - being ultimately repaid four years later by 2034. However, repayment under the Fitch base case is only two years later than under the original transaction. As the repayment dates are far in the future, the difference in years is viewed as a significant credit negative for the class B notes due to the greater uncertainty. At this level, the rating is also inherently more sensitive and hence more volatile. Under the breakeven analysis, the class B2 notes are fully repaid by 2042 with a decline in cumulative Fitch base case free cash flow (FCF) of 20.2% vs. 31.4% under the pre-refinancing structure and 24% under the original structure. Additionally, the limited trading data (44 weeks) available for Woburn introduces greater uncertainty to the cash flow projections, and the slightly weaker structural features (eg, class B restricted payment condition (RPC) reduced to 1.75x from 1.90x) also weigh down the rating.
FITCH BASE CASE
Woburn Cannibalisation Adjustment
To estimate how the opening of the Woburn site might affect the performance of the other four sites, Fitch extrapolated the average daily rate (ADR) for the four existing sites based on the first 44 weeks of Woburn trading data provided by management. The resulting growth rates for each site were then used to adjust the Fitch base case ADR projections for the first few years of the projected period.
Woburn Adjustment
Based on the first 44 weeks of Woburn weekly trading data for occupancy and ADR, Fitch adjusted the occupancy assumption to 95% from 96%. Analysis showed that ADR had started off at a high level but has subsequently fallen, which coincided with an increase in occupancy. However, it is likely that seasonality has some impact and it is also possible that the absence of the 'Winter Wonderland' attraction at Woburn this year (which will be present next year) may also have contributed to this. The management case set Woburn's ADR at GBP189.8. After adjusting for recent trends, Fitch set Woburn's ADR at a lower level, but at a 10% premium over the average of the other sites (around GBP170). This premium remains justified by the site's proximity to London where the median gross annual earnings are 37.4% higher than the average for the rest of the UK. Part of this premium in wages is absorbed by higher living costs but a 10% premium is expected to be sustainable.
Combined EBITDA Projection
EBITDA (after head office costs) is assumed to grow at a CAGR of negative 0.1% but the actual EBITDA generated is higher than the CAGR would suggest (with EBITDA growing until 2028 at a CAGR of 0.6%). This reflects the nature of the industry risk for Center Parcs Limited (CPL; the operating and borrower group company), whereby recent historical performance has been strong, leading to stronger growth in the early years. However, beyond 10 years, revenue visibility reduces, resulting in a subsequent forecast decline over the longer term.
Combined FCF Projection
FCF is forecast to grow at a long-term CAGR of negative 0.7% but the actual projected FCF is slightly uneven due to variable tax expenses. Growing tax and capex amounts contribute to the lower projected growth rate of FCF in comparison with revenues and EBITDA. As sales growth slows over the life of the transaction, the positive working capital cash contribution also falls.
KEY RATING DRIVERS
Industry Profile: Weaker
Fitch views the operating environment as 'weaker'. The UK holiday parks sector has both price and volume risks, which makes the projection of long-term future cash flows challenging. It is highly exposed to discretionary spending, and to some extent reliant on commodity and food prices. Event risk and weather risks are also significant. The regulatory environment is viewed as stable with moderate reliance on regulatory barriers. Fitch views the operating environment as a key driver of the industry profile, resulting in its overall 'weaker' assessment.
Fitch considers barriers to entry as 'midrange'. There is a scarcity of suitable, large sites near major conurbations, which is a credit-positive. Sites also require significant development time and must adhere to stringent planning permission processes. The cost of development is also prohibitively high. However, the wider industry is competitive and switching costs are viewed as fairly low.
Fitch views the sustainability of the sector as 'midrange'. A high level of capital spending is required to maintain the quality of the sites. The offering is also exposed to changing consumer behaviour (e.g. holidaying abroad or in alternative UK sites). However, technology risk is low and gradual UK population growth should benefit the industry.
Company Profile: Stronger
Fitch views financial performance as 'stronger'. CPL has demonstrated strong revenue growth despite past difficult economic environments, having generated seven-year revenue and EBITDA CAGRs to 2015 of 3% and 5.5% (not including Woburn), respectively. Growth has been driven by villa price increases, bolstered by committed development funding upgrading villa amenities and increasing capacity. An aspect of revenue stability is the high repeating customer base with around 60% of guests returning over a five-year period and 35% within 14 months.
The company's operations are viewed as 'stronger'. CPL is the UK's leading family-orientated short break holiday village operator, offering around 850 villas per site set in a forest environment with significant central leisure facilities. There are no direct competitors and the uniqueness of its offer differentiates the company from more basic camping and caravan offerings or overseas weekend breaks. Management has been stable, with the current CEO having been in place since 2000 and there are no known corporate governance issues.
CPL benefits from a high level of advance bookings, which helps operations. Operating leverage is moderate with fixed costs estimated at around 50%. Fitch views CPL as a medium-sized operator with FY15 EBITDA of GBP180.2m, but it benefits from some economies of scale. The Center Parcs brand is also fairly strong and the company benefits from other brands operated on a concession basis at its sites.
Fitch considers transparency as 'stronger'. As the business is largely self-operated, insight into underlying profitability is good. Despite an increasing portion of food and beverage revenues that are derived from concession agreements, these are mainly fully turnover-linked, thereby still giving some visibility on underlying performance.
Fitch views dependence on operator as 'midrange'. Only a few alternative operators are generally thought to be available.
Asset quality is viewed as 'stronger'. Within the UK holiday parks sector, Fitch considers the quality of the assets as stronger. CPL is heavily reliant on fairly high capex to keep its offer current. Fitch views it as a well-invested business with around GBP380m of capex since 2007 (around GBP225m of investment/refurbishment capex). As of end-4QFY15 refurbishments are on track with 84% of accommodation units having been upgraded since 2008. The upgrade of a further 106 lodges at Sherwood and Whinfell is expected to be completed in August 2015.
Debt Structure: Class A - Stronger, Class B - Weaker
Fitch considers the debt profile as 'stronger' for the class A notes and 'weaker' for the class B notes. All principal is fully amortising via cash sweep and the amortisation profile under Fitch's base case is commensurate with the industry and company profile. There is an interest-only period in relation to the class A notes, but no concurrent amortisation. The class A notes also benefit from the deferability of the junior-ranking class B. Additionally, the notes are all fixed-rate, avoiding any floating-rate exposure and swap liabilities.
The class B notes are sensitive to small changes in operating stress assumptions and particularly vulnerable towards the tail end of the transaction, as large amounts of accrued interest may have to be repaid, assuming the class B notes are not repaid at their expected maturity. This sensitivity stems from the interruption in cash interest payments upon a breach of the class A notes' RPC covenant (at 1.35x FCF DSCR) or failure to refinance any of the class A notes one year past expected maturity (all for the benefit of the class A notes).
Fitch views the security package as 'stronger' for the class A notes and 'weaker' for the class B notes. The transaction benefits from a comprehensive WBS security package, including full senior-ranking asset and share security available for the benefit of the noteholders. Security is granted by way of fully fixed and (qualifying) floating security under an issuer-borrower loan structure.
The class B noteholders benefit from a topco share pledge (structurally subordinate to the borrower group), and as such would be able to sell the shares upon a class B event of default (e.g. failure to refinance in 2020). However, as long as the class A notes are outstanding, only the class A noteholders are entitled to direct the relevant trustee with regard to the enforcement of any borrower security (e.g. if the class A notes cannot be refinanced one year after their expected maturity).
The structural features are viewed as 'stronger' for the class A notes and 'weaker' for the class B notes. Fitch views the covenant package as slightly weaker than other typical WBS deals. The financial covenants are only based on interest cover ratios (ICR) as there is no scheduled amortisation of the notes as typically seen in WBS transactions. The lack of DSCR-based financial RPC and covenants is compensated to a large extent by the full cash sweep features triggered until the final redemption of the class A notes if they do not get refinanced at their expected maturity.
In addition, the class A2, A3 and A4 notes benefit from full cash lock-up one year prior to their expected maturity (however, this falls away for the class A3 and A4 notes if there is a qualifying IPO). However, the class B notes also benefit from a performance-dependent RPC. As expected, as of end-April 2015, the class B notes' cumulative ICR at 1.86x was still below its RPC at 1.9x, so no dividends were being paid (except management fees) and cash was being locked up. Notably, following the class B refinancing, this covenant has been reduced to 1.75x, but this reduction is mitigated to some extent by the addition of a 7.5x gross WBS leverage partial lockup covenant. At GBP80m, the liquidity facility is appropriately sized covering 18 months of the class A notes' peak debt service. The class B notes do not benefit from any liquidity enhancement.
On a standalone basis, the structural features directly associated with the class B notes are fairly weak, being more akin to high-yield notes. However, they benefit indirectly from certain class A features such as the operational covenants, but only while the class A notes are outstanding.
Peer Group
The most suitable WBS comparisons are (i) pubs, and (ii) Roadchef, a WBS transaction of motorway service stations. CPL has proven to be less cyclical than Roadchef and the leased pubs with strong performance during major economic downturns (helped by a lower retail revenue contribution of around 10%). However, with just five sites (within the securitised group) CPL is considered less granular than WBS pub transactions.
RATING SENSITIVITIES
Class A notes
Negative: Deterioration in performance could result in negative rating action, particularly if Fitch-estimated synthetic FCF DSCR metrics fall below around 2.0x, in combination with deterioration in the expected leverage profile.
Positive: Any significant improvement in performance above Fitch's base case, with a resulting improvement in the Fitch-estimated synthetic FCF DSCR to above 2.6x, in addition to further deleveraging could result in positive rating action. The class A notes are unlikely to be rated above 'BBB+'. This is mainly due to the sector's substantial exposure to consumer discretionary spending and uncertainty as to whether the CPL concept will remain in favour over the long term.
Class B
Negative: Under Fitch's base case, the class B notes are expected to be repaid by around 2034, with a median synthetic FCF DSCR of around 1.6x. Any significant deterioration in these metrics could result in negative rating action.
Given the sensitivity of the class B notes to variations in performance due to its deferability, they are unlikely to be upgraded above the 'B' category in the foreseeable future.
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