Welcome Break plc, the U.K.-based motorway operator, was back in the market negotiating yet another round of refinancing in an attempt to save its securitization from falling into junk oblivion.

The ratings saga for this operating company securitization began last year, with Fitch Ratings taking action on the deal after keeping it on watch for nearly a year (see ASR 3/4/02). The class A1, A2 and A3 notes were all downgraded to BBB+' from A', and a class B tranche was downgraded to BB' from BBB'. At the time, analysts noted that future sale/lease-backed transactions executed by the company could result in further rating volatility. Fitch decided to keep the notes on ratings watch negative.

In the last several months, the company has submitted a series of refinancing proposals, the latest of which was done a few weeks ago. According to market reports, senior investors are asked to sell back the notes at a GBP0.92 discount. Initially they had been asked to sell at a GBP0.84 discount, which had been rejected.

One major difference between this and an earlier proposal is that, presuming 75% of the senior noteholders take the exchange, the remaining 25% are not obligated to accept the offer.

"If all goes according to the revised plan, there would be approximately 41.2% (21% in original plan) of senior notes outstanding post-refinancing, with all junior notes paid down," explained analysts at Deutsche Bank. "The offers are only effective if at least 75% of the outstanding principal amount held by noteholders accept the cash offer. In the revised term sheet from [July 9], Welcome Break provided an indicative timetable that stated that the company has been in discussions with investors since [June 13]."

Standard & Poor's has not released its final verdict on the current proposals, stating it will review the implications this will have on the existing transaction once a final offer is presented to noteholders. S&P, however, issued a press release last week stating that it will withdraw ratings if the offer is "accepted by noteholders at below the outstanding principal balance of the rated debt and [it is confirmed] that this debt had been extinguished."

Fitch, however, has moved ahead, as it did in February last year and has already downgraded the notes on the operating company transaction to Junk status maintaining a rating watch negative. The class A1, A2 and A3 notes have been downgraded to BB' and the class B notes to CCC'. Fitch stated that the action resulted from a lack of growth reported by the company in its trading up to May this year. The agency believed that, based on this financial report, Welcome Break was unlikely to meet the scheduled amortization payments beginning in June 2004. Analysts added that because the company was discussing refinancing or an equity injection to make future repayments meant that its investment-grade rating was unmerited at this point.

After the June refinancing proposal, analysts at the Deutsche Bank expressed concerns that, if the notes reached junk status, a substantial selling force would ensue that could add further pressure to secondary bond pricing. The noteholder meeting is scheduled for Aug. 12 and, if all goes as is planned, the sale should be completed by Aug. 15.

But not all is negative in the Motorway service sector. Last February, the Welcome Break downgrade was packaged as a double blow to investors, who also saw notes on Roadchef (a U.K. motorway service company) fall as well. Fitch downgraded the class A1 and A2 notes to BBB+' and the class B notes to BB'. At the beginning of this month, however, the agency affirmed the Roadchef notes, citing substantial capital investment and changes to the management structure over the past 18 months. Fitch expects these changes to generate substantial revenue going forward.


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