Zeus Bidco Limited -- Moody's assigns B1 CFR to Zeus Bidco and B1 senior secured debt rating to Zenith Finco's issuance

Rating Action: Moody's assigns B1 CFR to Zeus Bidco and B1 senior secured debt rating to Zenith Finco's issuanceGlobal Credit Research - 17 Jan 2022London, 17 January 2022 -- Moody's has today assigned a first time B1 long-term Corporate Family Rating (CFR) to Zeus Bidco Limited (Zenith), and B1 rating to the GBP475 million fixed rate senior secured notes to be issued out of Zenith Finco Plc. The issuers' outlook is stable.A full list of affected ratings can be found at the end of this press release.RATINGS RATIONALEThe CFR of B1 reflects Zenith's moderate size, steady and good level of cash flow generation, and solid debt servicing capacity, relatively high leverage, and moderate liquidity profile. Overall, the rating agency views Zenith's operating environment in the United Kingdom's vehicle finance sector as highly competitive and assigns a Ba operating environment score, reflecting the fact that larger captive auto finance companies as well as banks compete with Zenith on pricing and customer relationships.Zenith has an established track record of stable and primarily organic growth, and effective risk management as well as a diversified franchise across its funded and managed fleet business and various lessees. Its business has been based on a long standing, primarily high credit quality corporate client base to whom there is limited concentration risk. These factors have so far underpinned its steady performance which Moody's expects will continue to support its growth aspirations.The negative net income and tangible common equity, constrained by sizeable non-cash items, goodwill and intangibles, are not an impediment to the running of the business because the company largely depends on its cash flow to cover capital spending and to service debt. In addition, Zenith has strong residual value risk management practices and a proven track record in this area which moderates the risk to earnings and the balance sheet.On the other hand, Zenith's CFR is weighed down by its elevated leverage. This is captured by the issuers' relatively high debt to EBITDA, and moderate funds from operations to debt indicators, despite good cash flow generation. Moody's expects these indicators to improve only modestly over the next 12 to 18 months. The pending issuance of new secured debt and the new super senior secured revolving credit facility (RCF) will extend Zenith's funding maturity profile reducing refinancing risk but will also continue to contribute to Zenith's high asset encumbrance.In terms of governance, which is highly relevant to all finance companies, Zenith benefits from an experienced and long-standing management team. Thus, Moody's has no particular governance concerns in relation to Zenith. Nonetheless, corporate governance remains a key credit consideration and requires ongoing monitoring, as is the case for all financial institutions.The B1 rating assigned to the senior secured debt issuances of Zenith Finco Plc reflects the application of Moody's Loss Given Default for Speculative-Grade Companies methodology (LGD) (published in December 2015) and the priorities of claims in the proposed liability structure post the refinancing. The new capital structure contemplates the issuance of GBP475 million fixed rate senior secured debt, and a new GBP65 million Revolving Credit Facility (RCF). Moody's expects that the credit facility will be undrawn at the time of the transaction, but that its utilisation will vary in accordance with business needs. Whilst the RCF is senior to the secured notes, its moderate amount does not result in a material increase in the estimated expected loss for the senior secured notes. Thus, in accordance with Moody's LGD analysis, the senior secured notes are assigned a rating of B1 in line with the B1 CFR.OUTLOOKThe stable outlook reflects Moody's expectation that Zenith's credit fundamentals and capital structure will largely remain steady benefiting from the improved operating environment, strong free cash flow generation from underlying operations, reduced refinancing risk from the longer-term maturities of the new debt and access to liquidity via undrawn securitisation and revolving credit facilities.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe CFR could be upgraded if Zenith (i) improves its cashflow generation, profitability and debt servicing capacity, (ii) deleverages so that debt / EBITDA is maintained below 3.5; and/or (iii) improves its liquidity profile with significantly lower secured debt reliance and higher cashflow generation relative to its outstanding debt. An upgrade of the CFR would likely result in an upgrade of all ratings. The senior secured debt ratings could also be upgraded if there were significant changes in the liability structure, which would result in an increase in its expected recovery in a default scenario.The CFR could be downgraded if the company (i) were unable to maintain its cash flow generation; (ii) fails to maintain a sustainable profitability; and/or (iii) significantly increases its leverage for a prolonged time while consuming its cash balances. Additionally, the CFR could be downgraded if the prudent residual value management and risk appetite or its leading market position weaken deviating from its historical track record. The senior secured debt ratings could also be downgraded if there were significant changes in the liability structure, which would result in a decrease in expected recoveries for secured creditors in a default scenario or following the downgrade of the CFR. LIST OF AFFECTED RATINGS Issuer: Zeus Bidco Limited ..Assignment: ....Long-term Corporate Family Rating, assigned B1 Outlook Action: ..Outlook assigned Stable Issuer: Zenith Finco Plc ..Assignment: ....Senior Secured Regular Bond/Debenture, assigned B1 Outlook Action: ..Outlook assigned Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Arif Bekiroglu Vice President - Senior Analyst Financial Institutions Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Laurie Mayers Associate Managing Director Financial Institutions Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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