Fitch Affirms Amphora at 'B', Withdraws Rating

(The following statement was released by the rating agency) Fitch Ratings-Sydney-05 November 2020: Fitch Ratings has affirmed Amphora Finance Limited's Long-Term Issuer Default Rating (IDR) at 'B'. The Outlook is Negative. Fitch has also affirmed the rating on Amphora's senior secured GBP301 million Term Loan B due 2025 at 'BB-' with a Recovery Rating of 'RR2'. Amphora is a holding company that wholly owns Accolade Wines Holdings Australia Pty Limited, the fifth-largest wine company globally by volume and a leading competitor in the UK and Australia. At the same time, Fitch has chosen to withdraw the ratings on Amphora for commercial reasons. Key Rating Drivers Reduction of High Leverage Delayed: Fitch believes Accolade's ability to reduce its leverage, which has remained elevated since its acquisition by Carlyle Group (NASDAQ:CG), has been hampered in the short term by delays in achieving planned cost savings at its Berri facility and the coronavirus-related social distancing measures that affect its main markets of Australia and the UK. These markets made up around 85% of sales in the financial year ended June 2019 (FY19). We expect Accolade to commence deleveraging in FY21 and reach a level commensurate with its rating in FY22 - the first full-year of realisation of the planned cost savings and normal operations following the easing of the coronavirus restrictions. This is reflected in our Negative Outlook. Premiumisation Strategy Affected by COVID-19: Accolade's ability to sell more premium wines in its portfolio and improve its margin progressed well in FY20, with the winemaker achieving significant gains in premium wine volumes and market share in Australia and the UK. However, the premiumisation benefits achieved were partially offset by a change in channel mix, with more sales flowing through the lower margin off-trade market at the expense of the higher margin on-trade market due to pandemic-related restrictions. Furthermore, demand has not yet stabilised and remains exposed to the effects of the economic strain in Australia and the UK. We estimate the impact on Accolade's Asian operations was mainly in FY20, with a smaller flow into FY21, as coronavirus restrictions were implemented earlier in the region. Fitch expects Accolade's EBITDA margin to improve to 9% by FY23, compared with reaching over 10% by FY21 previously. However, we continue to believe that the move towards premium wines is a key growth driver in the wine industry over the long term, particularly in Accolade's key markets of Australia and the UK. Growth from China Delayed: Accolade's ability to increase its limited footprint in China has been hampered since the outbreak of COVID-19 in early 2020. Nevertheless, Fitch expects the ongoing easing of restrictions placed on socialising, as well as the company's small footprint in the country and the building of an experienced team to focus on its Chinese operations, to provide a base for growth in China from FY21. The country was the world's fifth-largest wine market in 2018, according to the International Organisation of Vine and Wine. Sustainable Supply: Accolade is reliant on external suppliers. We understand that it purchased its committed quantities for the 2020 harvest, despite market uncertainty as a result of the coronavirus or the presence of smoke taint following the recent Australian bushfires. This, along with stock build of premium wines to support the premiumisation strategy, led to the increase in Accolade's inventory at FYE20 and Fitch expects it to remain elevated in FYE21, while there is likely to be modest increases in production costs associated with sales over the next few years to mitigate the risk of smoke taint in the product. Leading Global Wine Producer: Accolade is the leading wine company in the UK by volume and value, with an 8% market share - twice the market of the second-largest UK competitor. In Australia, it is the leading competitor by volume and second by value. The UK and Australia rank sixth and 10th, respectively, in global total wine consumption, displaying resilient consumption during economic downturns. Accolade's portfolio of around 50 brands supports its position, and includes Hardys, the best-selling wine brand in the UK and one of the top-10 brands globally. Term Loan Notched for Security: The rating on the senior secured GBP301 million Term Loan B reflects the guarantee and security provided. The loan is guaranteed by entities within the wholly owned group, which cover at least 80% of group EBITDA, including all companies contributing 5% or more of group EBITDA on a standalone basis. The loan also benefits from a floating charge over the shares and all UK and Australian assets. Our bespoke analysis indicates a recovery given default of 90%, reflected in the 'RR2' Recovery Rating. Derivation Summary Amphora's rating reflects its high leverage, which constrains the company's IDR to 'B'. Amphora's financial profile is weaker than that of global peer, Russian spirits producer PJSC BELUGA GROUP (B+/Stable). This reflects Fitch's expectation that Amphora's FFO net leverage will remain above 4.0x until at least FYE23, compared with Beluga at around 1.0x lower over the same period. Beluga also has a leading market position in Russia, and a strong brand portfolio in the Russian spirits market. These factors account for the one-notch differential between the two companies' IDRs. Beluga's rating also reflects the higher-than-average systemic risks associated with the Russian business and jurisdictional environment. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer: - Group sales volume of between 24 million and 27 million nine-litre cases a year. This is around 10% lower than our previous forecast to reflect the impact of the coronavirus, excluding the effect of the exit of the US business. We now forecast volume will be 3%-4% lower in Australia and around 3% lower in the UK in FY21 than previous forecasts. - Price per case to increase due to premiumisation of Accolade's portfolio. We did not forecast any price increases in 1QFY21 in Australia and the UK to reflect the impact of coronavirus restrictions and the resultant strain on household finances. - Cost savings from Fine Wine Partners acquisition, as well as economies of scale and increased efficiencies from the Berri facility, with the first full year of savings in FY22. - Annual capex of around AUD40 million in FY20-FY21 and AUD25 million in FY22-FY23. - No deferral of grape purchases to offset any declines in volume as a result of coronavirus social distancing restrictions or potential smoke taint from the Australian bushfires. Inventory levels to rise and remain high at FYE20 and FYE21 and accounts receivable declining by FYE20 to reflect lower demand, with both returning towards historical levels thereafter. Recovery Assumptions: Amphora would remain a going concern in restructuring and be reorganised rather than liquidated. We have assumed a 10% administrative claim in the recovery analysis. A 10% uplift to FY19 Fitch-calculated EBITDA, reflecting our delays in expected cost savings from the Berri facility (around AUD17 million) and premiumisation of the portfolio, while taking into account smaller volumes in the UK as the business exits some low-margin items to reflect the structure of the business, and higher marketing costs as the business prioritises its Asian strategy. This results in a post-restructuring EBITDA of around AUD100 million; at this level, we would expect Amphora to generate positive free cash flow. A distressed multiple of 7.0x, reflecting Amphora's market position versus sector peers and recent sector multiples. The AUD150 million revolving credit facility would be fully drawn in a restructuring scenario. RATING SENSITIVITIES No rating sensitivities as the rating has been withdrawn. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Refinancing Provided Headroom: The capital structure, following completion of Carlyle's acquisition of Accolade, consists of a revolving credit facility of AUD150 million and the term loan of GBP301 million (AUD550 million), both of which are secured by group assets with a floating charge over the shares and all assets in the UK and Australia. Fitch expects the revolving credit facility to remain undrawn for most of the year and only to be used to fund short-term working-capital requirements. We expect the term loan to remain fully drawn and proceeds from the sale of non-core assets to help the company deleverage and provide additional liquidity. Therefore, Amphora has sufficient liquidity headroom over the next two-to-three years to implement its strategy, with little refinancing risk, as the debt maturities will only start to be due in five years. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Following the withdrawal of ratings for Amphora Fitch will no longer be providing the associated ESG Relevance Scores. Amphora Finance Limited; Long Term Issuer Default Rating; Affirmed; B; Rating Outlook Negative ; Long Term Issuer Default Rating; Withdrawn; WD ----senior secured; Long Term Rating; Affirmed; BB- ----senior secured; Long Term Rating; Withdrawn; WD Contacts: Primary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 26 Jun 2020) (https://www.fitchratings.com/site/re/10125796) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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