CROSS-SECTOR

SECTOR IN-DEPTH23 March 2021

TABLE OF CONTENTSAbout 12% of rated companiesobtained amendments to alleviatefinancial covenants 2Covenant relief by sector reflectsrelative exposure to the pandemic 2Covenant amendments peaked duringthe height of lockdowns 7Speculative-grade companies sawmost amendments, but investment-grade companies were not immune 7Moody’s related publications 9

Contacts

Richard Morawetz +44.20.7772.5408VP-Sr Credit Officerrichard.morawetz@moodys.com

Sandra Veseli +44.20.7772.5593MD-Corporate Financesandra.veseli@moodys.com

Marina Albo +34.917.688.311MD-EMEA Corporate Financemarina.albo@moodys.com

Nonfinancial Companies – EMEA

Financial covenant waivers give companiesleeway to rebuild battered earnings» About 12% of rated companies obtained amendments to alleviate financial

covenants in loan agreements in 2020. Often this was in the form of waivers totesting maintenance covenants in revolving credit facilities. This reflects the severepressure on earnings in some sectors as a result of the coronavirus pandemic. However,the fact that so many amendments were granted reflects banks' willingness to continueto support companies, and a recognition that the contraction in earnings is temporary formost and due to factors beyond their control.

» Covenant relief by sector reflects relative exposure to the pandemic. Sectors suchas transportation, consumer products and retail, automotive and services (includingrestaurants, leisure and lodging) saw the highest number of covenant resets. A numberof sectors are absent from the list of waivers, or with negligible cases, such as thetechnology sector, which has partly benefited from the pandemic, as well as the utilities,pharmaceuticals, packaging, telecoms and construction sectors.

» Covenants amendments peaked during the height of lockdowns. They have usuallybeen granted until 2021 or beyond, suggesting that the signatories expect a gradualnormalisation of earnings by then. Waivers often coincided with the introduction ofa minimum liquidity requirement, which implies that lenders are focusing more onthe solvency of the company to weather the crisis, at least temporarily, as opposed toearnings.

» Speculative-grade companies saw most amendments. They are generally moreexposed to an economic downturn and also accounted for the majority of rating actionsduring the pandemic. However, investment-grade companies were not immune. Thisreflects the nature of this particular downturn and its effects on some traditionally stablesectors, such as ground transport.

» Domicile is less relevant than sector exposure in influencing the level ofamendments. In particular, advanced and emerging markets have a similar share ofcompanies that obtained waivers. This reinforces the view that sector exposure to thepandemic has been more relevant for earnings performance than domicile.

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Scope of our analysis

We have collected data on amendments to bank loan agreements in 2020 for all EMEA nonfinancial companies, including infrastructurecompanies, with public and private ratings. For the most part, the amendments included covenant waivers and grace periods, changes toactual covenants and, in some cases, the addition or removal of certain covenants. In a small number of cases, other terms of loan agreementswere amended, such as maturity extensions, cessation of dividends, restricted payments or asset sales. Some of these amendments were donein the context of a default.

About 12% of rated companies obtained amendments to alleviate financial covenantsWe have identified 121 companies, or about 12% of rated companies, that obtained amendments to their loan agreements in 2020 inthe form of financial covenant relief. Often this was in the form of waivers to testing, for example for financial maintenance covenantsapplicable to revolving credit facilities. Companies in several sectors sought amendments because of the severe pressure on earningscaused by the coronavirus pandemic. The drop in earnings required a resetting of previously agreed financial covenants to avoid abreach, which is an event of default under the terms of loan documents. However, the fact that so many amendments were grantedreflects a willingness of banks to continue to support companies, and a recognition that the contraction in earnings is temporary formost companies and due to factors beyond their control.

In many cases, the temporary nature of the covenant waivers is based on the assumption of a recovery in earnings that will enablecompanies to comply with covenants when the grace periods expire. Many of our ratings and outlooks are based on a similarassumption.

Covenant relief by sector reflects relative exposure to the pandemicThe sectors hit hardest by the pandemic, such as services, transportation, and segments of consumer products and retail, saw thehighest number of covenant resets (Exhibit 1), accounting for two-thirds of the total. However, this also reflects the number of ratingsin those sectors to some degree. More representative of the comparable level of earnings pressure facing each sector is the numberof companies with covenant resets as a percentage of total ratings – which shows a similar picture, with autos and media also beingaffected (Exhibit 2). Several sectors are absent from the list of waivers, or with negligible cases, such as the technology sector, whichhas partly benefited from the pandemic, and also the utilities, pharmaceuticals, packaging, telecoms and construction sectors.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

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Exhibit 1

Covenant resets by sectorExhibit 2

Covenant resets by sector as a % of total ratings

Services33%

Transportation 18%

Consumer Products9%

Retail8%

Energy5%

Other22%

Automotive5%

Source: Moody's Investors Service

% of rated companies

Transportation Services 31%

Services 26%

Media 24%

Gaming 23%

Automotive 21%

Retail 18%

Consumer Products 17%

Energy 11%

Healthcare 11%

Metals & Mining 10%

Other 3%

Total 12%

Services includes leisure, lodging, entertainment and restaurants.Source: Moody's Investors Service

Pandemic exposure and covenant resets vary among services companiesA broad range of services companies amended covenants in loan agreements because their activities were severely curtailed bythe pandemic. These include lodging and tourism operators, and companies that service the travel industry. Numerous leisure,entertainment and restaurant operators and gaming companies also obtained covenant waivers (Exhibit 3). But many other servicescompanies were more immune to the downturn and did not require waivers, such as education, postal and healthcare services.

Exhibit 3

A broad array of services companies obtained covenant waivers

Company Domicile/activity Rating Covenant amendment detailsLodging and restaurants Alpha Group (A&O Hotels and Hostels) Jersey (hotels) Caa2 negative Obtained a covenant waiver whose conditions included

a minimum cash position which we believe could still bebreached later in 2021

NH Hotel Group SA Spain (hotels) B3 stable The covenants on the RCF and the term loan were waiveduntil June 2021

PAX Midco Spain (Areas) Spain (restaurants) B3 negative Springing senior secured net leverage covenant test waiveduntil December 2021. During this waiver period, the companywill need to comply with a monthly minimum liquidity test

Thame and London Limited (TraveLodge) United Kingdom(hotels)

Caa1 negative Covenant terms of RCF revised with existing terms replacedwith a minimum liquidity covenant of £10m until June 2021

Leisure & entertainment Crown UK Holdco Limited (Cineworld) United Kingdom

(cinema operator)Caa2 negative The company secured a waiver for the financial maintenance

covenant of its original RCF until June 2022. The RCF leveragecovenant will be triggered above 35% utilisation and will besubject to testing twice a year from June 2022

Hurtigruten Group Norway (cruise shipoperator)

Caa1 negative The company received covenant waivers for its RCF throughthe end of 2022 from its lenders

Vue International Bidco PLC Leisure &entertainment (cinemaoperator)

Caa2 negative In September 2020 the company obtained a waiver ontesting the springing covenant (net leverage) of its RCF untilthe end of August 2021 and the company will need to onlycomply with a minimum liquidity test

Miscellaneous services companies eDreams ODIGEO SA Luxembourg (air travel

bookings)B3 negative The company secured a waiver on the RCF's springing gross

leverage covenant for fiscal 2021.Elior Group S.A. France (catering and

support services)Ba3 negative The company obtained a covenant waiver for September

2020 and March 2021Elis S.A. France (Provider to the

hospitality sector andother end markets)

Ba2 negative The company obtained a waiver for its covenant test as of30 June 2020, which applies to the RCFs and the US privateplacement (USPP) debt.

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Franklin UK Midco Holding United Kingdom (VATrefunds, currencyconversion)

B3 negative The company has obtained a covenant waiver for its springingRCF leverage covenant until 31 December 2021.

Gategroup Holding AG Switzerland (cateringand logistics services toairlines)

Caa2 neg The covenants on the RCF and term loan were modified toinclude only a minimum liquidity test

Pinnacle Bidco plc (PureGym) United Kingdom(health and fitness cluboperator)

B3 negative The RCF has one springing covenant that is tested when thefacility is over 40% drawn, but this has been replaced with a£30 million minimum liquidity test until August 2022

TUI AG Germany (Integratedtourism group)

Caa1 stable In April 2020, TUI renegotiated a financial covenant holidayfor its RCF until September 2021.

Company Domicile/activity Rating Covenant amendment detailsGaming & related companies Codere S.A. Spain (Gaming) Caa3 stable Following a DE in November 2020, the debt maturity of the

senior secured notes was extended by two years; a minimumliquidity covenant was introduced; the interest rate waschanged from a full cash-pay coupon to a combination ofcash-pay and PIK toggle mechanism, at the company's option

Inspired Entertainment Inc United States (supplierof gaming systems andterminals)

Caa1 stable Following a default and amendment of its facilitiesagreement, the RCF contains a leverage covenant which wasrevised with adequate headroom, although this materiallytightens from June 2021 onwards.

William Hill PLC United Kingdom(Gaming)

Ba3 RUR The covenants for the RCF were waived for 2020 and relaxedwith comfortable headroom for 2021

Source: Moody's Investors Service

Airports saw high volume of covenant resets as air traffic plummetedThe travel sector was one of the first to be affected by the downturn, and will likely be one of the last to fully recover and remainsconstrained by ongoing quarantine rules in many countries. The sector, and in particular airports, saw a high number of covenantamendments in the form of grace periods (Exhibit 4). In a number of cases, such as Birmingham Airport (Finance) plc (Baa3 negative),Manchester Airport Group Funding Plc (Baa1 negative), Airports Company South Africa SOC Ltd (Ba2 negative) and CopenhagenAirports A/S (Baa2 negative), we have indicated that barring a revival in air traffic, a further waiver may be required. A numberof affected companies have investment-grade ratings, reflecting in some cases government ownership, strong liquidity, and theexpectation of a gradual recovery in earnings.

Exhibit 4

Covenant waivers for transport companies reflect sharp decline in demand

Company Domicile Rating Covenant amendment detailsAirports Aena S.M.E., S.A Spain A3 negative In December 2020 the company obtained waivers until at least June 2022

for certain financial covenantsAeroporti di Roma S.p.A. Italy Baa3 negative ADR has requested and obtained waiver approvals for its financial

covenants (net debt/EBITDA and interest cover) until June 2021Aeroports de la Cote d'Azur France Baa2 negative ACA received approvals to waive its financial covenants until June 2021

from its lendersAirports Company South AfricaSOC Ltd

South Africa Ba2 negative In June 2020, the company received covenant waivers for the period until30 June 2022

Birmingham Airport (Finance) Plc United Kingdom Baa3 negative BAF obtained covenant waivers covering the period to March 2021. As partof the agreement with creditors, the group will not pay dividends duringthe waiver period

Copenhagen Airports A/S Denmark Baa2 negative CPH entered into waiver agreements with existing lenders, providing CPHwith relief from certain loan covenants until and including Q1 2021

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Gatwick Funding Limited United Kingdom Baa2 negative In September 2020, the company received waiver approval on bothcovenants until 30 June 2021. The next test date will be on 31 December2021. In addition, the company's senior RAR calculation was amended inrespect of dates including 31 December 2021 to 30 June 2023.

Heathrow Finance plc United Kingdom Ba2 negative HF obtained a waiver for the Interest Cover Ratio covenant and to increasethe HF Net Debt/RAB (Regulatory Asset Base) threshold in 2020 and2021. In addition, as part of the process, HF proposed a prohibition ondividend payments for the duration of the waiver period or, if later, untilNet Debt/ RAB reaches the level of 87.5% or below

Manchester Airport GroupFunding Plc

United Kingdom Baa1 negative MAG received covenant waivers for the period until March 2021, andthe leverage calculation was amended for the next test period as of end-September 2021.

Passenger railways National Express Group PLC United Kingdom Ba1 negative National Express’ credit lines contain gearing and interest cover covenants

which have been waived or amended until December 2021; during thewaiver period maximum net debt and minimum liquidity covenants apply

Stagecoach Group Plc United Kingdom Baa3 negative Stagecoach's credit facilities contain net leverage and EBITDA coveragecovenants, which have been waived for the testing dates 31 October 2020,1 May 2021 and 30 October 2021; during the waiver period minimumliquidity levels apply

Source: Moody's Investors Service

Consumer goods and retail companies were badly affected by store closuresThe consumer products and retail companies that obtained covenant waivers were generally in the more cyclical segments, suchas travel retail, wedding apparel (Catluxe Acquisitions), apparel (Takko, Burberry, Marks & Spencer), eyewear (Marcolin) and gardenfurniture (Keter). In some cases this was done more as a precautionary measure. By contrast, pure food retailers are absent from the listof waivers, and partly benefited from the closure of other food venues (Exhibit 5). While some nonfood retailers were able to offset losthigh-street sales with online sales, this was clearly not sufficient to prevent a slump in earnings in 2020.

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Exhibit 5

Retailers and consumer goods companies obtained covenant waivers in the wake of store closures

Company Domicile Rating Covenant amendment detailsRetail Barloworld Limited South Africa Ba2 negative in April 2020, the EBITDA to interest covenant was renegotiated

from 3.5 times to 2.5 timesBurberry Group plc United Kingdom Baa2 stable A waiver for the RCF leverage covenant was agreed until

September 2021, as well as a restriction on shareholderdistributions during the period of the waiver, which the Group canopt out of prior to 25 September 2021

Dufry AG Switzerland B1 negative The company agreed a financial covenants holiday with lendersunder the syndicated facilities until September 2021. During thewaiver, the lenders require Dufry to maintain minimum liquidity ofCHF 300 million

Marks & Spencer PLC United Kingdom Ba1 negative M&S retains full access to its £1.1 billion RCF after agreeingamendments, in March 2020, to the semi-annual financialcovenant test through to September 2021

Takko Fashion S.a r.l. Germany Caa2 stable Takko’s RCF has a single minimum EBITDA covenant set at €110million. The company obtained a temporary waiver for thiscovenant

Consumer products CatLuxe Acquisition S.a.r.l.(Pronovias)

Spain Caa2 negative The company has secured a covenant holiday for the leveragecovenant in its RCF until June 2022, with a new minimum liquiditycovenant being introduced

Keter Group B.V. Netherlands B3 stable The springing covenant test was renegotiated for June 2020 toMarch 2021, with minimum EBITDA of €80 million and minimumcash at the end of each month of €20 million

Marcolin S.p.A. Italy B3 negative As part of a refinancing, Marcolin obtained a covenant holiday forits RCF springing covenant until September 2021

Source: Moody's Investors Service

Diverse waivers in other sectors reflected some individual company characteristics

EnergyAmid low oil and gas exploration and production investments by major oil producers, Shelf Drilling Ltd. (Caa2 negative), an operatorof oil rigs, suffered from contract cancellations and suspensions by oil producers in 2020. It received a nine-month covenant waiverfor the leverage covenant in its RCF until September 2021, although following a recent bond issuance, the RCF is to be repaid andcancelled.

Puma Energy Holdings Pte. Ltd (B1 negative), a midstream and downstream operator that stores and distributes refined oil products,saw a sharp drop in demand in 2020. In May 2020 it obtained a waiver to its net worth covenant to reflect the reduced size of thebusiness following some disposals. Its interest cover covenant was also amended until December 2020 such that we expect it tomaintain adequate capacity under the covenants of its bank facilities.

AutomotiveThe auto sector was one of the most exposed to the crisis, although in terms of covenant amendments, these tended to occur amongauto parts suppliers. Nevertheless, we have a stable industry outlook for both segments because we expect auto sales to show a strongrecovery this year and next.

In conjunction with a market recovery, certain waivers are also expected to expire this year. Examples include ZF Friedrichshafen AG(Ba1 negative), whose net debt/EBITDA covenant was relaxed until March 31 2021, while adding a minimum liquidity requirement of€1,500 million during the period and Grupo Antolin-Irausa, S.A. (B3 stable), whose RCF covenants were suspended up to and includingJune 2021.

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HealthcareHealthcare providers, such as care homes, have been more resilient to the crisis in terms of credit quality, but some medical servicesproviders were still affected. Auris Luxembourg II S.A. (WS Audiology, B3 negative), a supplier of hearing aids, suffered a significant dropin demand because its core customer base is aged over 65 years and is most vulnerable to the virus. In addition, its main distributionchannel is physical retail because purchasing a hearing aid requires several visits to an audiologist. The company and RCF lendersagreed on a covenant amendment from a springing flat net leverage covenant to a minimum liquidity covenant until December 2021.

Similarly, Limacorporate S.p.A. (B3 stable), a manufacturer of orthopaedic medical devices, saw a sharp drop in profit in the first halfof 2020 as many orthopaedic procedures were postponed to prioritise the treatment of COVID-19 patients. As a result, the financialcovenant under its loan documentation was amended from a springing net leverage covenant to a minimum liquidity covenant fromJune 2020 until September 2021.

Telecoms and mediaThe telecoms sector has clearly not suffered as much as others, but revenue growth is nevertheless correlated with GDP growth, witha one-year lag. Demand was affected by the temporary closure of the sector's sales network in 2020, while travel restrictions alsoaffected roaming revenue. Cyfrowy Polsat S.A. (Ba1 stable), the Polish telecoms operator, announced in April that it had amended theterms of its loan facilities, including a loosening of a number of financial covenants (leverage and debt service cover). This was mainlyto adjust for the effects on reported leverage due to the implementation of IFRS16, while also changing the repayment schedule.

While well within its covenants, ITV PLC (Baa3 stable) agreed with its banking group, as a precautionary measure, to replace theleverage and interest cover covenants in its RCF with a cap on covenant net debt and a minimum covenant liquidity requirement until30 December 2021. In addition, ITV agreed not to pay a dividend during the period of the amendment.

Real estateReal estate is a sector that could see some longer-term changes in demand from the pandemic if part of the recent trend to remoteworking and the shift to online sales becomes entrenched. We have indicated that commercial real estate has been comparativelymore exposed to the pandemic than residential, and we retain a negative industry outlook on the sector overall. However, we expectresidential and logistics to outperform the wider sector because of stronger fundamentals and a better outlook.

As a company heavily exposed to the UK retail sector, and facing a sharp fall in rent collection rates in the UK and France in the firsthalf of 2020, Hammerson Plc (Baa3 negative) announced in July a revision to the covenants for its private placement notes, notablyincreased headroom under its unencumbered asset covenant ratio until December 2021, as well as a new minimum liquidity covenant.

Covenant amendments peaked during the height of lockdownsThe peak of covenant amendments occurred in April to June 2020, at the height of lockdowns in many countries (Exhibit 6). Oftenthe waivers have been granted until some point in 2021 or beyond, suggesting that the signatories expect a gradual normalisation ofearnings by then. Nevertheless, in some cases we have indicated that a further waiver or other amendment may be required to avoida breach. By far the most frequent covenant to be reset was for leverage, and to a lesser degree for interest cover metrics, and in somecases both. These usually involved a grace period for testing.

In instances where financial covenants were waived, this often coincided with the introduction of a minimum liquidity requirement.This suggests that while company metrics are expected to deviate substantially from what was originally agreed, the lenders arefocusing more on the actual solvency of the company to weather the crisis, at least temporarily, as opposed to earnings.

Speculative-grade companies saw most amendments, but investment-grade companies were notimmuneCompanies with speculative-grade ratings saw the clear majority of covenant resets, accounting for 79% of the total. Fifteen percentof rated speculative-grade companies saw a covenant reset, versus 7% for investment-grade companies (Exhibit 7). The divergence isto be expected, given that speculative-grade companies are generally more vulnerable to an economic downturn, and have accountedfor the majority of negative rating actions during the pandemic. Also, loan documents for investment-grade companies often do notcontain any financial covenants, which lessens the likelihood of a potential breach or the need to amend any covenants in a downturn.

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However, while credit quality is clearly correlated with covenant amendments, the fact that a relatively high number of investment-grade companies have had resets reflects the nature of this particular downturn. As noted earlier, this includes a fairly high number intransportation services, some with government ownership. Demand for these services, while usually quite stable, is highly dependenton the free movement of people, so earnings should recover when travel restrictions are lifted.

Exhibit 6

Covenant resets by month in 2020Exhibit 7

Covenant resets by rating

0

5

10

15

20

25

30

35

Source: Moody's Investors Service

Rating % of total resets % of rated companies

Investment Grade 21% 7%

Speculative grade 79% 15%

Ba1 6% 12%

Ba2 8% 22%

Ba3 3% 7%

B1 5% 8%

B2 4% 3%

B3 18% 14%

Caa1 & below 36% 47%

Total 100% 12%

Based on companies in our September 2020 liquidity report and ratings as of February2021. Includes covenant waivers; new or removed covenants (e.g. minimum liquidity; networth metric; unencumbered asset ratio).Source: Moody's Investors Service

Domicile is less relevant than sector exposure in influencing the level of amendmentsThe breakdown by domicile shows that covenant resets were quite diverse, while also reflecting the number of rated entities in eachcountry (with the caveat that domicile does not always represent a company’s main area of operations, Exhibit 8). About 88% oftotal resets occurred in advanced markets, and 12% in emerging markets1, which is in line with the share of actual ratings in the samecountries (Exhibit 9). This reinforces the view that sector exposure to the pandemic has been more relevant than domicile, a conclusionalso drawn in our annual liquidity review in 2020.

Exhibit 8

Covenant resets by domicileExhibit 9

Covenant resets: advanced vs emerging marketsRatings and resets as % of total ratings and resets

United Kingdom28%

Spain12%

France11%

Netherlands7%

Germany6%

Italy5%

South Africa5%

Luxembourg4%

Other22%

Source: Moody's Investors Service

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% advanced % emerging

% of rated NFC % of covenant resets

Source: Moody's Investors Service

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Moody’s related publications

» Global Macro Outlook 2021-22 (February 2021 Update): G-20 economies will return to growth in 2021 but recovery will not beuniform, February 2021

» Nonfinancial companies – EMEA: Increased borrowing eases pandemic induced pressure on liquidity, September 2020

» Leveraged Loan Covenants - North America: Covenant-relief amendments skyrocket as revolving lenders extract concessions, July2020

» North American Loan Covenant Quality Indicator: Protections hit rock bottom just ahead of market turbulence, April 2020

» Leveraged loan covenants – North America: Revolving lenders have upper hand over term lenders as crisis stresses borrowers, March2020

Endnotes1 These are defined using Moody’s statistical handbook

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10 23 March 2021 Nonfinancial Companies – EMEA: Financial covenant waivers give companies leeway to rebuild battered earnings

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11 23 March 2021 Nonfinancial Companies – EMEA: Financial covenant waivers give companies leeway to rebuild battered earnings