Fitch Ratings has revised the Outlook on doValue S.p.A.’s Long-Term Issuer Default Rating (IDR) to Stable from Positive and affirmed the IDR at ‘BB’. Fitch has also affirmed doValue’s EUR265 million and EUR300 million senior bonds due in 2025 and 2026 at ‘BB’. A full list of rating actions is below.
The revision of the Outlook to Stable reflects a weaker performance in Spain than we previously expected after the company’s largest contract was not extended last year.
Key Rating Drivers
Sound Franchise, Asset-light Model: doValue’s ratings reflect its strong franchise in the southern European distressed debt and real estate servicing market, a cash-generative and asset-light business model that is largely immune from rising funding costs, as well as good profitability and liquidity. The ratings also consider debt the company incurred to finance two large acquisitions in Spain and Greece in 2019 and 2020, and weak performance in Spain following the loss of a large contract in 2022, although annual collections increased to EUR5.5 billion in 2022 from EUR2.0 billion in 2018.
Diversified Operations: doValue has a good record of integrating new subsidiaries. Fitch regards its material acquisitions in Spain and Greece as EBITDA-accretive and complementary to the historical Italian franchise. Underperformance of the Iberian (Spain and Portugal) segment (contributing just 2% to total adjusted EBITDA in 2022 compared with 21% in 2021) has been offset by the Hellenic (Greece and Cyprus) segment’s strong profitability (2022: 74%; 2021: 60%).
Cash-Generative Business Model: Debt servicing is a capital-light and cash-generative business, with long-term contracts offering good visibility of workflow and resourcing requirements. Contracts also typically feature significant base servicing fees and indemnity payments should the client sell non-performing loans (NPL) portfolios serviced by doValue, and long cure periods in the event of any short-term underperformance on the part of the servicer.
Client Concentrations: doValue’s expansion has reduced revenue concentration by both customer and geography. The company has added significant real estate-owned capabilities (15% of gross revenues in 2022), unlikely-to-pay (7%) and early arrears (2%), but NPL remains the largest business line (76%).
Termination of Sareb (Spain’s bad bank, and doValue’s second-largest client at the time, accounting for 15% of end-2021 gross book value; GBV) adversely affected doValue’s Spanish franchise in 2022 and highlighted the risks of client concentration and debt-funded growth.
Focus on Secured Exposures: Lockdown measures at the peak of the pandemic demonstrated the disadvantages of the focus on secured and larger-ticket NPLs (65% of gross revenues in 2022), which require lengthy judicial procedures compared with smaller-ticket NPLs. However, doValue’s scale and expertise provide it with competitive advantages in this challenging market.
High Operating Costs: doValue’s collections rate of 4.1% on average GBV in 2022 was sound but slightly weaker than 2021 (4.3%). The Fitch-calculated EBITDA margin was 36% in 2022 (2021: 32%) and pre-tax return on average assets was 6.1% (2021: 4.0%). Operating expenses consumed 83% of gross revenues in 2022 (2021: 87%), highlighting the labour-intensive nature of the business model. However, the company is implementing an optimisation strategy as part of synergies from its acquisitions.
Stable Leverage: Leverage has improved over the past few years as EBITDA generated by the new subsidiaries has increased. doValue targets net debt to adjusted EBITDA of 2x-3x. Fitch measures leverage on a gross debt basis, which was 2.8x at end-2022, down from 3.2x a year before. Acquisition activity has introduced significant intangible assets to doValue’s balance sheet, negatively affecting its tangible equity position. The company’s high dividend payout slows equity accumulation.
Good Liquidity: At end-1Q23, doValue had sound liquidity with cash of EUR126 million and EUR130 million unutilised committed bank lines, while gross debt mostly consisted of doValue’s two bonds totalling EUR560 million. Absent further acquisitions, doValue has no anticipated refinancing needs before the maturity of its EUR265 million bond in August 2025.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Gross debt/EBITDA exceeding of 3.5x without a clear path to meaningful deleveraging could result in a downgrade, particularly if accompanied by other factors.
-Under-performance of collection key performance indicators, leading to lower fee income and ultimately potential contract losses if not mitigated by contract growth or other remedial measures.
-A material increase in doValue’s risk appetite, as reflected, for example, in weakening risk governance and controls.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-A reduction in gross debt/EBITDA below 2.5x on a sustained basis, in conjunction with stable collections performance.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
doValue has two outstanding senior bonds totalling EUR560 million at end-1Q23. The senior bonds’ rating is in line with doValue’s ‘BB’ Long-Term IDR, reflecting Fitch’s expectation of average recovery prospects, as the bonds rank pari passu with the company’s bank facilities. The bonds are principally secured by doValue’s shares in its subsidiaries, who are also guarantors of the bonds.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
SENIOR BONDS
The senior bonds’ rating is primarily sensitive to changes in doValue’s Long-Term IDR.
Changes to Fitch’s assessment of recovery prospects for the senior bonds in a default, e.g. as a result of introduction to doValue’s debt structure of material lower- (or higher-) ranking debt, could also result in the senior bonds’ rating being notched up or down from the Long-Term IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond 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
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
Source: Fitch Ratings
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