Fitch Ratings has downgraded
Fitch has also downgraded
DDM is a small
Key Rating Drivers
The downgrade reflects Fitch's view that DDM's gross debt/adjusted EBITDA (5.3x at end-1Q22) will remain above Fitch's previously stated downgrade trigger of 4.5x in the medium term because of lower-than-expected capital deployment in EBITDA-generating assets and is no longer commensurate with its previous 'B' rating. The rating action also considers a material erosion in DDM's liquidity buffer following a number of investments outside its core debt purchasing business and the absence of contingent liquidity following the expiry of its revolving credit facility (RCF).
The RWN reflects pressure on DDM's liquidity profile in the short term with the company principally relying on continued sound collection performance to service an upcoming coupon payment in 4Q22.
DDM's Long-Term IDR reflects its small size versus rated peers', more volatile performance and more concentrated business model. Compared with higher-rated peers', DDM's franchise is small (120 months estimated remaining collections (ERC) of
Since 2021, DDM has announced several investments outside its core debt purchasing business line, partly funded with proceeds from a bond issue in 2021. These include the planned acquisitions of
We view investments in Swiss Bankers and Omnio as negative for DDM's credit profile because these companies have limited synergies with DDM's core debt purchasing business model and could undermine its cash-generating capacity. Although the acquisition of AxFina, announced on
While the Omnio and Axfina transactions were conducted at arm's length and were subject to external valuations, the transactions involved a related party (DDM's ultimate owners).
At end-1Q22, DDM's liquidity position was acceptable, with
In the TTM to end-1Q22, gross collections were
DDM's TTM EBITDA (adjusted for portfolio amortisations) was
DDM's gross debt/EBITDA ratio was a high 5.3x at end-1Q22, up from 1.3x at end-2020. The increase was driven by a material reduction in EBITDA, but also a significant increase in outstanding debt (to
The rating on
DDM has an ESG Relevance Score of '4' for governance structure, primarily reflecting the recent material increase in related-party transactions.
DDM has an ESG Relevance Score of '4' for management strategy reflecting DDM's more opportunistic strategy when compared to other debt purchasing peers.
DDM has an ESG Relevance Score of '4' for financial transparency, in view of the significance of internal modelling to portfolio valuations and associated metrics such as ERC. This has a moderately negative influence on the rating, but is a feature of the debt purchasing sector as a whole, and not specific to DDM.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Prolonged liquidity shortage, jeopardising DDM's ability to service its debt obligations or execute its strategy
Further marked deterioration in profitability and leverage, including from negative results on financial investments
Signs that planned acquisitions are materially increasing DDM's exposure to operational or legal risks
A downgrade of DDM's Long-Term IDR would likely be mirrored on the company's senior secured bond rating
Worsening recovery expectations, for instance as a result of a layer of more senior debt, could lead Fitch to notch the secured notes' rating down from
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The RWN on DDM's issuer and issue ratings reflects that upside for the ratings is limited in the short-to- medium term
The affirmation of the rating would require a material improvement in DDM's liquidity position and a stabilisation of its leverage ratio
An upgrade in the medium term would require stabilisation of DDM's business model and improvement in profitability and leverage, chiefly maintaining gross debt/EBITDA comfortably below 4.5x
The secured notes' rating is principally sensitive to changes in
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 '
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