OREANDA-NEWS. Fitch Ratings has affirmed CPUK Finance Limited's class A2, A3 and A4 notes at 'BBB', and class B2 notes at 'B'. The Outlooks are Stable.

The affirmation is driven by the strong performance of the four original sites and the recently added Woburn site. The Stable Outlook reflects Fitch's expectation that the good quality estate, with the proactive and experienced management will continue to deliver steady performance over the medium term, despite the weaker UK economic outlook and increased uncertainty following the UK referendum vote to leave the EU.

KEY RATING DRIVERS (KRDs)

KRD - Industry Profile: Weaker

Sub-KRDs: operating environment - 'weaker', barriers to entry - 'midrange', sustainability - 'midrange'

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 exposed to commodity and food prices. Events and weather risks are also significant, with Center Parcs (CP) having been affected by a fire and minor flooding in the past. Fitch views the operating environment as a key driver of the industry profile, resulting in its overall 'weaker' assessment.

In terms of barriers to entry, there is a scarcity of suitable, large sites near major conurbations, which is a credit positive. Sites require significant development time and must adhere to stringent planning permission processes, and the cost of development is prohibitively high. A high level of capital spending is also required to maintain the quality of the sites. However, the wider industry is competitive and switching costs are viewed as fairly low. The offering is also exposed to changing consumer behaviour (e. g. holidaying abroad or in alternative UK sites), but gradual UK population growth should benefit the industry.

KRD - Company Profile: Stronger

Sub-KRDs: financial performance - 'stronger', company operations - 'stronger', transparency - 'stronger', dependence on operator - 'midrange', asset quality - 'stronger'

CP is the UK's leading family-orientated short break holiday village operator, offering around 830 villas per site set in a forest environment with significant central leisure facilities. Fitch views CP as a medium-sized operator with FY16 (52 weeks ended 21 April 2016) EBITDA of GBP198.2m, and it benefits from some economies of scale. Revenue growth has been consistent despite past difficult economic environments, with CP having generated eight-year revenue and EBITDA CAGRs to FY15 of 3.0% 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 five years and 35% within 14 months. CP also benefits from a high level of advanced bookings. There are no direct competitors and the uniqueness of its offer differentiates the company from camping and caravan options 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.

The Center Parcs brand is fairly strong and the company benefits from other brands operated on a concession basis at its sites. 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 fully turnover-linked, thereby still giving some visibility of the underlying performance.

CP is heavily reliant on fairly high capex to keep its offer current. Fitch views it as a well-invested business, with around GBP400m of capex since 2007, including around GBP250m for developments and refurbishments. As of end-FY16 refurbishments are on track with 95% of accommodation units having been upgraded since 2008. The upgrade of the remaining 200 lodges is expected to be completed in FY17.

KRD - Debt Structure: Class A - Stronger, Class B - Weaker

Sub-KRDs: debt profile - class A: 'stronger', class B: 'weaker', security package - class A: 'stronger', class B: 'weaker', structural features - class A: 'stronger', class B 'weaker'

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. This is because large amounts of accrued interest may have to be repaid, assuming the class B notes are not repaid at their expected maturity. The sensitivity stems from the interruption in cash interest payments upon a breach of the class A notes' cash lockup covenant (at 1.35x free cash flow (FCF) debt service coverage ratio; DSCR) or failure to refinance any of the class A notes one year past expected maturity.

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 subordinated 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 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).

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. However, the lack of DSCR-based cash lockup triggers and covenants is compensated by the cash sweep feature. 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 but benefit from certain features while the class A notes are outstanding such as the operational covenants.

Peer Group

The most suitable WBS comparisons are (i) pubs, and (ii) Roadchef, a WBS transaction of motorway service stations. CP has proven to be less cyclical than Roadchef and the leased pubs with strong performance during major economic downturns. However, with just five sites, we consider CP less granular than WBS pub transactions. In terms of projected metrics, CP tends to have higher coverage at a given rating level than the Fitch rated pubcos, reflecting the 'weaker' industry profile assessment, vs. 'midrange' for pubs.

TRANSACTION UPDATE

CP delivered a strong performance in the 52-week period to April 2016. The fifth site at Woburn is now fully integrated into the securitised group. Revenue for the combined group increased by 9.1% to GBP420.2m reflecting strong growth in both accommodation and on-village revenue streams. When adjusting for the lower number of weeks of Woburn's reported data, growth remains strong at an estimated 6%. Accommodation growth was driven by record high group occupancy levels of 98% (despite 1.5% of capacity being off-line) and average daily rate growth of 5%.

Cost control was adequate, helping to deliver EBITDA growth of 10% with a stable margin of 47%. Similar to revenues, Fitch estimates EBITDA growth adjusted for weeks of Woburn's reported data at around 6%. This translated into stable cash flow with class A and B notes 52-week ICR/DSCRs reported at 4.0x and 2.2x, respectively. Compared with the refinancing in August 2015, net debt to EBITDA has come down to 4.7x from 5.0x for the class A notes and to 7.5x from 8.0x for the class B notes.

The deleveraging profile is broadly in line with the previous review despite the upwards re-basing of EBITDA. This is partly due to the cash lockup mechanics that allow more cash to be up-streamed in the early years of the transaction. Fitch's projected synthetic FCF DSCRs also remain in line with the previous review at 2.3x and 1.5x for the class A and B notes, respectively. As permitted under the financing documentation, the group paid a dividend of GBP23.0m in April 2016, and subsequent to year-end paid out a further GBP9.8m. We understand these dividends will partly be used to fund the development of the new planned Irish site.

In terms of outlook, while Brexit may have a slight negative impact on performance to the extent that it leads to weaker UK economic growth, this risk factor is mitigated by the increased propensity of UK holidaymakers to stay at home due to reduced discretionary spending budgets and weaker sterling, and CP's demonstrated historical resilience throughout previous economic cycles.

RATING SENSITIVITIES

Class A Notes

Negative: Deterioration in performance could result in negative rating action if there is a significant extension in the current projected full gradual deleveraging by 2028 and if Fitch-estimated synthetic FCF DSCR metrics fall below 2.0x. Weaker performance could be driven by reduced discretionary spending and greater cost pressure as a result of weak UK economic growth and cost driven inflation following the vote to leave the EU.

Positive: Any significant improvement in performance above Fitch's base case, with a resulting contraction in the Fitch-projected gradual full deleveraging by 2028, and improvement in the synthetic FCF DSCR to above 2.6x, could result in a 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 CP concept will remain popular 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.

SUMMARY OF CREDIT

CPUK Finance Limited is a securitisation of five holiday villages in the UK operated by Center Parcs Limited. 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.