OREANDA-NEWS. Fitch Ratings has affirmed CPUK Finance Ltd.'s notes, as follows:

GBP300m class A1 fixed-rate secured notes due 2042: affirmed at 'BBB'; Outlook Stable
GBP440m class A2 fixed-rate secured notes due 2042: affirmed at 'BBB'; Outlook Stable
GBP280m class B fixed-rate secured notes due 2042: affirmed at 'B+'; Outlook Stable

The affirmation is driven by the on-going stable performance of Center Parcs Limited (CPL; the operating and borrower group company, which consists of four holiday sites) with 1H15 revenue (24 weeks) rising by 1.9% to GBP153.9m and EBITDA by 1.6% to GBP76.0m. Growth was slightly hindered by the effect of the new Woburn site (which opened in June 2014), but was supported by the continuation of CPL's capex programme with GBP39.6m of total capex invested in 2014 (representing 12.6% of sales) and GBP12.5m in 1H15.

The Stable Outlook reflects Fitch's expectation that the relatively good quality estate and proactive (and experienced) management will continue to deliver steady performance over the next few years.

CPUK Finance Ltd. is a whole business securitisation (WBS) of four purpose-built holiday villages in the UK: Sherwood Forest in Nottinghamshire; Longleat Forest in Wiltshire; Elveden Forest in Suffolk and Whinfell Forest in Cumbria.

KEY RATING DRIVERS
Industry Profile: Weaker
Fitch views the operating environment as 'weaker'. 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 reliant on commodity and food prices. Event risk and weather risks are also significant. The regulatory environment is viewed as stable with moderate reliance on any particular regulatory barrier. Fitch views the operating environment as a key driver of the industry profile, resulting in its overall 'weaker' assessment.

Fitch considers barriers to entry as 'midrange'. There is a scarcity of suitable, large sites near major conurbations, which is a credit positive. Sites also require significant development time and must adhere to stringent planning permission processes. The cost of development is also prohibitively high. However, the wider industry is competitive and switching costs are viewed as relatively low.

The sustainability of the sector is viewed as 'midrange'. A high level of capital spending is required to maintain the quality of the sites. The offering is also exposed to changing consumer behaviour (e.g. holidaying abroad or in alternative UK sites). However, technology risk is low and gradual UK population growth should benefit the industry.

Company Profile: Stronger
Fitch views financial performance as 'stronger'. CPL has demonstrated strong revenue growth despite past difficult economic environments, having generated seven-year revenue and EBITDA CAGRs to 2014 of 3.2% and 6.3%, 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 60% of the guests returning over a five-year period and 35% within 14 months.

The company's operations are viewed as 'stronger'. CPL is the UK's leading family-orientated short break holiday village operator, offering around 850 villas per site set in a forest environment with significant central leisure facilities. There are no direct competitors and the uniqueness of its offer differentiates the company from more basic camping and caravan offerings 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. CPL benefits from a high level of advance bookings, which helps operations. Operating leverage is moderate with fixed costs estimated at around 50%. CPL is viewed as a medium-sized operator with FY14 EBITDA of GBP146.8m, but it benefits from some economies of scale. The Center Parcs brand is also fairly strong and the company benefits from other brands operated on a concession basis at its sites.

Transparency is viewed as 'stronger'. 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 mainly fully turnover linked thereby still giving some insight into underlying performance. They also only make up 22% of FY14 total revenues.

Fitch views dependence on operator as 'midrange'. Only a few alternative operators are generally thought to be available.

Asset quality is viewed as 'stronger'. Within the UK holiday parks sector, the quality of the assets is viewed as stronger. CPL is heavily reliant on relatively high capex in order to keep its offer current. Fitch views it as a well invested business with around GBP360m of capex since 2007 (around GBP215m of investment/refurbishment capex). As of 1H15, refurbishments are on track with 80% of all 3,421 units having been refurbished, leaving 696 to go with planned upgrades of a further 167 units in the remainder of FY15.

Debt Structure: Class A - Stronger, Class B - Weaker
The debt profile is viewed as 'stronger' for the class A notes and 'weaker' for the class B notes. 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 very sensitive to small changes in operating stress assumptions and particularly vulnerable towards the tail end of the transaction, as large amounts of accrued interest may have to be repaid - assuming the class B notes are not repaid at their expected maturity. This sensitivity stems from the interruption in cash interest payments upon a breach of the class A notes' restricted payments covenant (RPC) (at 1.35x FCF DSCR) or failure to refinance either the class A notes one year past expected maturity or the class B notes at their expected maturity (all for the benefit of the class A notes).

Fitch views the security package as 'stronger' for the class A notes and 'weaker' for the class B notes. 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 (sitting above and hence structurally subordinate 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 2018). However, as long as the class A notes are outstanding, only the class A noteholders are entitled to direct the relevant trustee with regards to the enforcement of any borrower security (e.g. if the class A notes cannot be refinanced one year after their expected maturity).

The structural features are viewed as 'stronger' for the class A notes and 'weaker' for the class B notes. The covenant package is viewed as slightly weaker than other typical WBS deals. The financial covenants are effectively only based on interest cover ratios (ICR) as there is no scheduled amortisation of the notes as typically seen in WBS transactions. The lack of debt service cover ratios (DSCR)-based financial RPCs and covenants is compensated to a large extent by the full cash sweep features triggered until the final redemption of the class A notes in the event they do not get refinanced within 12 months after their expected maturity.

In addition, the class A1 notes benefit from 25% cash trap in year 3, 50% cash trap in year 4 and a full cash lock-up one year prior to their expected maturity. However, the class B notes also benefit from a performance dependent RPC which is set at quite a strict level. As expected, as of October 2014, the class B notes' cumulative interest cover ratio at 1.87x was still below its RPC at 1.9x, so no dividends are being paid (except management fees) and cash is being locked up.

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.

On a standalone basis, the structural features directly associated to the class B notes are relatively weak, being more akin to high yield notes. However, they benefit indirectly from certain class A features such as the operational covenants, but only while the class A notes are outstanding.

Peer Group - the most suitable WBS comparisons are (i) the pubs, and (ii) Roadchef, a WBS transaction of motorway service stations. CPL has proven to be less cyclical than Roadchef and the leased pubs with strong performance during major economic downturns (helped by a lower retail revenue contribution of around 10%). However, with just four sites (within the securitised group) CPL is considered less granular than the WBS transactions of pubs.

RATING SENSITIVITIES
Class A - Negative: A deterioration in performance could result in negative rating action particularly if the Fitch estimated synthetic FCF DSCR metrics were to move below around 1.9x in combination with a deterioration in the expected leverage profile.
Class A - Positive: Any significant improvement in performance above Fitch's base case, with a resulting improvement in the Fitch estimated synthetic FCF DSCR to above 2.5x, in addition to further deleveraging could result in positive rating action. The class A notes are unlikely to be rated above 'BBB+'. This is mainly due the sector's substantial exposure to consumer discretionary spending and concerns as to whether the CPL concept will remain in favour over the long term.

Class B - Negative: Under Fitch's base case, the class B notes are expected to be repaid by around 2032, with a median synthetic FCF DSCR of around 1.4x. 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, the class B notes are unlikely to be upgraded in the foreseeable future.

TRANSACTION PERFORMANCE
CPL has continued to perform well with FY14 (FYE 24 April 2014) revenues growing by 3.7% and EBITDA by 4.9%, driven primarily by continued average daily rate (ADR) growth, reflecting both price increases and increased yield from the accommodation upgrades. EBITDA was also helped by on-site spend growth and effective cost control.

During 1H FY15, 24-week revenue and EBITDA growth were more subdued versus the previous year at 1.9% and 1.6%, respectively - growth at the sites of Elveden and Longleat were slightly lower due to the effect of the opening of the Woburn site. Management also reported that revenue growth was partly offset by payroll and marketing cost increases. Fitch expects the impact of the new site to be temporary (around two years), which Fitch accounts for in its base case. The new site in Woburn is expected to accede to the WBS transaction (assuming certain covenants are met).

Under Fitch's base case, EBITDA is expected to grow at a long-term CAGR of around -0.1% and FCF at around -1.0%. This is despite gradual EBTIDA growth forecast in the medium term. This reflects the nature of the industry risk for CPL, whereby recent historical performance has been strong. However, in Fitch's view beyond around 10 years, revenue visibility reduces considerably resulting in the forecast decline over the longer term. The resulting projected synthetic FCF DSCRs are expected to fluctuate around 2.1x for the class A notes and 1.4x for the class B notes, which is broadly in line with the previous review.

1H15 gross EBITDA leverage also improved from 5.2x and 7.2x (1H14) to around 5.0x and 6.9x for the class A and B notes, respectively.