(The following statement was released by the rating agency) Fitch Ratings-Sydney-March 31: Fitch Ratings has revised the Outlook on Amphora Finance Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and has affirmed the rating at 'B'. Fitch has also affirmed the rating on Amphora's senior secured GBP301 million Term Loan B, due in 2025, at 'BB-' with a Recovery Rating of 'RR2'. Amphora is a holding company that wholly owns Accolade Wines, the fifth-largest wine company globally by volume and a leading competitor in the UK and Australia. The Negative Outlook reflects the risks to Amphora's deleveraging such that its leverage - measured as funds from operations/net debt (FFO net leverage) - remains above 5.0x longer than our previous expectations. This is due to the company experiencing delays in achieving its cost savings, together with its premiumisation strategy - a key driver for improving profitability that involves appealing to consumers by emphasising exclusivity and better quality - to be hindered by the coronavirus restrictions globally. In particular, we believe social distancing measures implemented by the Australian and UK governments will see lower demand for premium wines that is likely to continue even after the restrictions are lifted, as unemployment surges and household finances come under increasing strain. As a result, Fitch expects FFO net leverage to remain above the negative sensitivity of 5.0x until the financial year ending June 2022 (FY22) and for Accolade's EBITDA margin to stay below 10% until at least FY23. This compares with our prior forecast, which saw Accolade deleverage to below its previous negative sensitivities in FY21. Accolade's volume is likely to be less affected, as consumers substitute on-premise for off-premise drinking in its two main markets, Australia and the UK - although this is unlikely to be a one-for-one trade. Furthermore, Accolade is under-represented in off-premises trade in Australia and in both markets has a portfolio that remains skewed to lower-value wines. This should also support its volume. The affirmation reflects our assessment that Accolade will still achieve significant cost savings and improve its profitability as it implements its strategy over the long term. This may take around a year longer than previously anticipated owing to delays in achieving cost savings because of commissioning issues, which have since been mostly resolved, and a redesign of part of the bottling system, which has been partially resolved and will be completed following the installation of the second line at Berri in FY21, and compounded by COVID-19. However, we believe the changes will provide a strong foundation for profitability, better cash flow and deleveraging to a level in line with its rating, once implemented. Fitch has amended Accolade's rating sensitivities to reflect the impact of our new methodology on the treatment of leases following the implementation of accounting standards dealing with the treatment of leases. Under our methodology, we no longer capitalise leases as debt for alcoholic beverage companies, and instead treat leases as operating expenses. Our new rating sensitivities can be found below. Key Rating Drivers High Leverage, Reduction Delayed: Fitch believes that 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 it 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 FY19. We now expect Accolade to commence deleveraging in FY21 and for our new metric, FFO net leverage, to fall to 5.0x in FY22 - the first full-year of realisation of the expected cost savings and normal operations following easing of the coronavirus restrictions. This is a year later than our previous expectations and is reflected in our Negative Outlook. Premiumisation Strategy Affected by COVID-19: We expect Accolade's ability to achieve premiumisation of its portfolio, and improve its margin, to be subdued in the short-term because of social distancing and the surge in unemployment as governments deal with the coronavirus pandemic. Fitch now expects that consumers in Australia and the UK will prefer to purchase lower-priced wine during 4QFY20 and 1QFY21 as household finances remain strained. We believe that this trend will begin to reverse towards the end of 2020, but is one of the main factors slowing our expectations of Accolade's EBITDA improvement. We expect the impact on Accolade's Asian operations to be mainly felt in FY20, as coronavirus restrictions were implemented earlier in the region. We believe that there will continue to be some delays to successfully pursuing premiumisation in FY21, but that this will be less pronounced than in Australia and the UK as restrictions begin to ease. Fitch now 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 trend towards premiumisation 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, with restrictions placed on socialising weakening demand for alcohol in the country. Nevertheless, Fitch expects the easing of restrictions, probably over the coming months, as well as the company's small footprint in the country and building of an experienced team to focus on its Chinese operations, to provide a base for growth in China, the world's fifth-largest wine market in 2018, according to the International Organisation of Vine and Wine. We have included some benefits of the company's expansion into China from FY21. Sustainable Supply: Accolade is reliant on external suppliers, in particular The Riverland Grape Producers Co-operative (CCW), which supplies nearly half of Accolade's grapes under an evergreen supply contract. We understand that Accolade has committed to purchasing its committed quantities during the 2020 harvest, despite any potential declines in demand as a result of coronavirus or due to the presence of smoke taint following the recent Australian bushfires, which affected some Accolade-sourced grapes in the Barossa Valley. As a result, Fitch expects Accolade's inventory levels to be elevated at FYE20 and 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 8% market share; this is twice the market of the second-largest UK competitor. In Australia, it is the leading competitor by volume and number two by value. The UK and Australia rank sixth and tenth, respectively, in total wine consumption globally and consumption has been resilient even during economic downturns. Accolade's portfolio of around 50 brands supports its market position, and includes Hardys - the best-selling wine brand in the UK and one of the top-10 brands globally. Term Loan B Notched for Security: The rating on Amphora's senior secured GBP301 million Term Loan B, due 2025, reflects the guarantee and security provided under its terms. 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 security over group assets, with a floating charge over the shares and all assets in the UK and Australia. Our bespoke analysis indicates a recovery given default of 90%, as reflected in the 'RR2' Recovery Rating assigned to the loan. 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's of around 1.0x lower over the same period. Beluga also has a leading market position in Russia and 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 coronavirus, excluding the effect of the exit of the US business. We now expect forecast volumes to be 3%-4% lower in Australia and around 3% lower in the UK in FY20 and FY21 than previous forecasts. - Price per case to increase due to premiumisation of Accolade's portfolio. We do not forecast any price increases in 4QFY20 and 1QFY21 in Australia and the UK to reflect the impact of coronavirus restrictions and resultant strains 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 to decline by FYE20 to reflect lower demand, with both returning towards historical levels thereafter. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead us to Revise the Outlook to Stable include: - FFO net leverage improving to below 5.0x for a sustained period. - EBITDA margin improving to above 10.0% for a sustained period (FYE19: 9.7%). - Delivery of the business plan, including the Berri plant being operational, cost savings materialising, success of brand rationalisation and premiumisation and the implementation of the China strategy. Developments that May, Individually or Collectively, Lead to Negative Rating Action - FFO net leverage deteriorating to above 5.0x for a sustained period. - EBITDA margin deteriorating to below 10.0% for a sustained period. - Deterioration in the group's business profile; for example, if volume declines by 20% or more for a sustained period, the sale of one or more of its main brands without a proven replacement or loss of a major customer in the concentrated UK or Australia liquor markets, such as Tesco (LON:TSCO) PLC (BBB-/Stable) in the UK or Woolworths Limited and Coles Supermarkets Australia Pty Ltd in Australia. Best/Worst Case Rating Scenario 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, go to 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 a term loan of GBP301 million (AUD550 million equivalent), 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 the majority of the year, 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 only start to come 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 ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Amphora Finance Limited; Long Term Issuer Default Rating; Affirmed; B; RO:Neg ----senior secured; Long Term Rating; Affirmed; BB- Contacts: Primary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 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. 27 Mar 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10111917 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. 27 Mar 2020) https://www.fitchratings.com/site/re/10112524 Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v7.8.0 1-https://www.fitchratings.com/site/re/968880 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10116070 Solicitation Status https://www.fitchratings.com/site/pr/10116070#solicitation Endorsement Status https://www.fitchratings.com/site/pr/10116070#endorsement_status Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING https://www.fitchratings.com/site/dam/jcr:6b03c4cd-611d-47ec-b8f1-183c01b51b08/R ating%20Definitions%20-%203%20May%202019%20v3%206-11-19.pdf DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.