Fitch Ratings has maintained
Key Rating Drivers
The RWN primarily reflects Fitch's view that despite moderate improvements in 3Q22, DDM's liquidity position remains tight and its cash-generating capacity in the short term might be weaker than Fitch previously assumed due to material investments in illiquid, non-core assets. In particular, the announced investment in Nordiska Kreditmarknadsaktiebolaget (publ) (Nordiska), which is to acquire
The acquisition also materially increases DDM's exposure to equity investments, which could lead to a less favourable capitalisation and leverage assessment and Fitch putting more emphasis on DDM's balance sheet capitalisation (gross debt/tangible equity).
Apart from large investments outside its core debt purchasing business, the ratings also reflect DDM's weak profitability, elevated leverage and the absence of contingent liquidity following the expiry of its revolving credit facility (RCF) in 2022.
Non-Core Investments: Since 2021, DDM has announced several investments, partly funded with proceeds from a bond issue in 2021. These include the planned acquisition of Swiss Bankers, which will be structured through acquiring a minority stake in a small
We view investments in Nordiska/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 a 50.2% stake in AxFina was more complementary to DDM's business model, the transaction weighed on DDM's already weak liquidity and leverage metrics.
Tight Liquidity: At end-3Q22, DDM had
Elevated Leverage: DDM's gross debt/EBITDA ratio was a high 4.1x at end-3Q22 (end-2021: 5.3x). The improvement in 9M22 was driven by strong collections in 3Q22. Its net debt/EBITDA ratio was 3.0x at end-3Q22, but we expect the cash buffer to be largely consumed by investment activity in 1Q23. DDM's gross debt/tangible equity ratio, which is Fitch's core benchmark metric for investment companies, deteriorated to 21x at end-3Q22, due to a decline in tangible equity caused by goodwill from the AxFina acquisition.
Volatile Collections: Gross collections were
Weak Profitability: DDM's TTM EBITDA was
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A materially weaker liquidity position following the closing of the Nordiska/Swiss Bankers acquisition combined with weak projected cash generation, which could jeopardise 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.
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.
An affirmation of the ratings would require stabilisation of DDM's liquidity position after the Swiss Bankers/Nordiska acquisition.
An upgrade in the medium term would require improvement in DDM's recurring profitability and leverage metrics, both in terms of cash-flow and balance-sheet leverage, including a gross debt/adjusted EBITDA ratio comfortably below 4.5x on a sustained basis.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The rating on
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
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 '
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
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 estimated remaining collections. 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.
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
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