oWe now believe that travel and other restrictions due to COVID-19 could result in global air passenger traffic dropping by about 50% in 2020, which is a steeper decline than we anticipated, with the recovery taking longer, possibly extending into 2023.

oThis revenue shortfall for Amadeus will only be partly offset by material cost-cutting and cash-conservation initiatives implemented by the company, so we forecast materially weaker credit metrics in 2020 and 2021 than in our previous base case.

oWe note that Amadeus has strengthened its liquidity position in the past couple of months, and we believe that the company is now better positioned from a liquidity and funding perspective to support a prolonged air traffic deterioration.

oWe are therefore lowering our ratings on Amadeus IT Group S.A. to 'BBB-' from 'BBB' and removing them from CreditWatch, where they were placed with negative implications on March 24, 2020. The outlook is negative. At the same time, we are the lowering our short-term issue-level ratings on the company to 'A-3' from 'A-2'.

oThe negative outlook reflects our view that Amadeus' financial metrics will be under considerable pressure in the next few quarters in the current difficult operating environment. We could lower the ratings if we expected our four-year (including 2018, 2019, 2020, and 2021) weighted average S&P Global Ratings-adjusted leverage to exceed 3x or if we believed that the industry fundamentals or Amadeus' competitive position had weakened durably.

PARIS (S&P Global Ratings) June 2, 2020--S&P Global Ratings today took the rating actions listed above. Actions to contain the pandemic, including government-imposed social-distancing measures, travel restrictions, and stay-at-home orders, have suddenly and sharply reduced global demand for air travel. We think air passenger traffic in Amadeus' operating countries could drop by about 50% in 2020, which is approximately in line with the most recent global air traffic forecasts by the International Air Transport Association (IATA). For 2021, we believe passenger volumes could remain about 30% below 2019 levels, globally, and we don't expect air traffic to rebound to pre-pandemic levels before 2023. Although a vaccine might ultimately protect populations in the medium to long term, the risk of renewed outbreaks over the next 12-18 months is real and will likely make governments hesitant about lifting international travel restrictions. We now forecast a global recession this year, with GDP growth falling 2.4% in 2020 before rebounding to 5.9% in 2021, with the eurozone contracting 7.3% in 2020 and recovering with 5.6% growth in 2021. We think domestic travel will increase before international travel, since international borders will take longer to open up. The revenue shortfall and fixed operating costs, only partly offset by strict cost-cutting measures and deferral or suspension of discretionary spending, will compress earnings and cash flows, resulting in weak credit metrics for airlines in 2020 and 2021. The company has announced an efficiency plan that it expects to save about EUR300 million in fixed costs and capital expenditure (capex) per year. We estimate that a nearly 50% revenue decline in 2020 will result in an EBITDA drop of about 80%. We also anticipate free operating cash flow (FOCF) to be materially negative in 2020 due to high capex of about EUR600 million, as well as significant negative working capital of EUR400 million-EUR500 million, as a result of delays in revenue collection or potential defaults by clients. For 2021, we estimate that a revenue decline of about 30% compared with 2019 will lead to a 45%-50% EBITDA drop. However, we expect working capital to normalize and Amadeus to generate EUR400 million-EUR450 million of FOCF. For 2020, we estimate negative adjusted credit metrics, due to expected negative adjusted EBITDA. Under our base case of a 30% air traffic decline in 2021 and 15% in 2022 compared with 2019, partly offset by the company's mitigating actions to reduce costs, we expect Amadeus' S&P Global Ratings-adjusted leverage to move to about 3.5x-4.5x by end of 2021 and to further decline to below 3.0x by 2022. On a weighted average basis, we expect S&P Global Ratings-adjusted leverage to not exceed 3x. Amadeus has a leading market position as one of the largest information technology providers in the global travel and tourism industry, making it an essential part of this industry ecosystem. Before the COVID-19 pandemic, Amadeus reported growing airline, hospitality, and software businesses and solid operating performance and cash flow generation. Moreover, Amadeus has a strong presence in complementary and synergistic business models, which improve efficiency, support economies of scale, and reinforce high barriers to entry. Notwithstanding, we see two risks that could weaken its business strength, depending on developments. First, Amadeus is materially exposed to a number of airlines that have a narrow equity base and could face defaults in the medium term. Second, there is high uncertainty about the pace and degree of recovery in the airline industry, which could imply a lasting change in the industry fundamentals, as explained further below. Amadeus has short-term debt maturities that it plans to repay with the recently issued EUR1 billion in bonds, nearly EUR472 million of commercial paper maturing in different months during 2020, a EUR500 million bond maturing in October 2020, and about EUR100 million of operating lease payment obligations per year. In 2021, the company has another EUR500 million in bonds maturing in November 2021 and nearly EUR100 million in commercial paper maturing in different months of 2021. In addition, we estimate that Amadeus has cash needs of about EUR600 million for capex, about EUR75 million of cash interest and financial fees, EUR80 million-EUR85 million of tax cash payments, and EUR400 million-EUR500 million of potential working capital needs in the next 12 months.

We note that, in the past couple of months, Amadeus was able to successfully issue a EUR750 million convertible bond, a EUR1 billion Eurobond, and EUR750 million of additional equity. We believe that this proves the company's strong standing in the credit market and the confidence of the lenders in the company's strengths. To meet these payment obligations, Amadeus has EUR2.2 billion of cash on the balance sheet and an uncovenanted undrawn revolving credit facility of EUR1 billion and a bridge loan of EUR1 billion. The successful additional facilities have led to a comfortable liquidity buffer.

The marked deterioration in the global macroeconomic outlook, and the likelihood that social distancing measures will continue for a sustained period, mean that a complete recovery of air traffic is highly uncertain. There has been much industry speculation regarding structural changes to the industry that might occur as a result of the COVID-19 pandemic:

oSocial distancing might require less crowded security checks, shorter queues, and changes to aircraft seating configurations, together with heightened health and sanitation measures.

oAirlines have dramatically deferred the purchase of new aircraft, and we will see reduced fleet sizes.

oIndustry consolidation is likely in the medium term as weaker airlines fail.

oThe mix of business and leisure travellers could change. More lucrative business travel might decline if employees get used to remote working and working habits evolve.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

The negative outlook reflects our view that Amadeus' leverage metrics will be under considerable pressure over the next few quarters given the impact of lockdown and distancing measures. It also reflects high uncertainty regarding the pace and degree of any business recovery.

A downgrade would be likely over the next few weeks if we saw a deterioration of our weighted average adjusted leverage above 3x. This could occur if the pandemic couldn't be contained, resulting in prolonged lockdowns and travel restrictions, or if passengers remained reluctant to book flights. We could also lower the rating if we assessed a weakening of Amadeus' business strength, led by either a lasting deterioration of industry fundamentals, for example, because demand levels did not recover to historical levels, or if Amadeus' competitive position became more vulnerable, for example, due to a deterioration of the creditworthiness of the airlines that form its client base.

We could revise the outlook to stable if we believed that demand conditions would normalize in line with our base case and that the recovery would be robust enough to enable Amadeus to partly restore its financial strength, such as adjusted leverage decreasing sustainably below 3x, alongside strong FOCF generation and an adequate liquidity position. We would expect this to be further underpinned by prudent capital spending and shareholder returns.

Environmental, social, and governance (ESG) factors relevant to the rating action:

oSocial; health and safety

Related Criteria

oGeneral Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019

oGeneral Criteria: Group Rating Methodology, July 1, 2019

oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

oCriteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018

oGeneral Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014

oCriteria | Corporates | Industrials: Key Credit Factors For The Leisure And Sports Industry, March 5, 2014

oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013

oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

oGeneral Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

S&P Global Ratings is the world's leading provider of independent credit ratings. Our ratings are essential to driving growth, providing transparency and helping educate market participants so they can make decisions with confidence. We have more than 1 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities. We offer an independent view of the market built on a unique combination of broad perspective and local insight. We provide our opinions and research about relative credit risk; market participants gain independent information to help support the growth of transparent, liquid debt markets worldwide.

S&P Global Ratings is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit www.spglobal.com/ratings.

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