oWe expect a steep contraction in demand for international holiday travel following the outbreak of COVID-19 will cause an up to 50% decline in TUI AG's revenue in 2020 and a 20%-30% decline in 2021, compared with EUR19 billion in 2019.
oWhile the German state provided TUI a EUR1.8 billion new liquidity facility in April, we believe a further facility will be necessary given high macroeconomic uncertainty and unclear customer-booking behavior for this summer.
oWe are therefore lowering our ratings on TUI and the group's debt to 'CCC+' from 'B-'.
oThe negative outlook reflects our view that TUI's capital structure could become unsustainable, absent any material equity injection, and the risk the company could deplete its liquidity without further liquidity lines.
FRANKFURT (S&P Global Ratings) June 8, 2020--S&P Global Ratings today took the rating actions listed above. We expect a steeper contraction in demand for international tourism in 2020, and a slower recovery in 2021 than previously anticipated.
We have lowered our global economic forecasts for 2020 and 2021 to reflect the initial extension of lockdowns in major European economies, and a likely slower recovery (see "COVID-19 Deals A Larger, Longer Hit To Global GDP," published April 16, 2020, and "Global Credit Conditions: Rising Credit Pressures Amid Deeper Recession, Uncertain Recovery Path," published April 22, 2020). Even as many global economies begin a staged reopening of businesses and leisure activities, travel--particularly international--is still one of the worst affected sectors. In our view, demand for leisure flights to TUI's main destinations in Western and the Eastern Mediterranean will significantly reduce during the peak summer season because containment measures, including travel restrictions in destinations outside the EU, government-mandated quarantine periods in the U.K., and less-confident consumer sentiment, will continue to constrain travel demand in Europe, especially to destinations such as Turkey, Egypt, or Morocco, in our view. We anticipate this will materially affect TUI's customer bookings and that its revenue could decline by up to 50% in 2020 from about EUR19 billion in 2019. Despite a likely return to growth in 2021, we expect revenue could remain 20%-30% down in 2021 versus 2019.
The group's capital structure includes an upsized EUR3.35 billion senior unsecured revolving credit facility (RCF) as a main liquidity facility, after it secured the additional EUR1.8 billion liquidity facility from KfW, the German state-owned development bank. The amended agreement provides for a covenant waiver on the financial maintenance covenants included until September 2021, and therefore TUI will benefit from the full availability of the facility next year. As of May 10, 2020, TUI had about EUR2.1 billion in cash sources available, including cash on balance sheet and funds available through its RCF. However, given the disrupted operations and expected decline in demand for summer holidays, we believe the group will need further cash sources to cover fix costs and outflows for customer refunds, interest, and minimum capital expenditure (capex). We estimate total cash burn per month at about EUR650 million at the current level of mostly suspended operations. We also consider the material uncertainty around customer's willingness and ability to travel internationally this year, resulting in high uncertainty around TUI's business recovery path following the end of lockdown this summer. While we believe that most EU destinations and source markets will reopen for tourists from mid-June 2020, we expect muted customer demand will only partly fill capacity, resulting in price pressure and the risk that TUI's fix costs will not be fully covered this summer. We also believe holiday cancellations and refunds for customers already booked to destinations outside the EU will likely continue, putting pressure on cash generation. However, we also think refunds to customers travelling to EU destinations, which form the largest part of TUI's summer program, will likely stop from July. This, coupled with reemerging customer bookings translating into cash inflows through customer pre-payments, as well as the compensation from Boeing for the ongoing grounding of TUI's 737 Max aircrafts will materially lower TUI's monthly cash depletion. On balance, we believe that TUI could still face somewhat negative free cash flow generation during this year's summer holiday season, and that additional funding will be required to sustain liquidity throughout the low season starting from autumn, or even earlier if customer demand and new bookings remain behind our expectation after lockdown ends this summer. Under our base-case assumptions, TUI's cash burn during 2020 and potentially beyond will pose significant risks to its capital structure. We estimate the company will have EUR3.2 billion-EUR4.0 billion in interest-bearing debt on the balance sheet (excluding all lease and pension debt) by the end of fiscal 2020 (ending Sept. 30, 2020), compared with only about EUR1.2 billion in fiscal 2019. This is despite our expectation of successful execution of the Hapag-Lloyd disposal, with expected net proceeds of about EUR650 million to be received in summer 2020. Under our base case, we also estimate TUI's earnings in fiscal 2021 will be materially below those in 2019, based on our estimated recovery path for TUI's business and despite the announced fix cost reduction of up to 30%. As a consequence, we believe that the company's capital structure could become unsustainable and see a risk of restructuring in the medium term, absent any material equity injection. We also note that KfW can terminate the new EUR1.8 billion liquidity early if the EUR300 million senior unsecured notes are not refinanced three months ahead of their maturity in October 2021. In light of the current situation in the high-yield financial market and the notes' trading levels, we see a new debt issue as unlikely in the short term, thereby increasing refinancing risks.
oHealth and safety
The negative outlook reflects our view that TUI's capital structure could become unsustainable, absent any material equity injection. It also reflects the risk that the company could deplete its liquidity in the low season in autumn, or even earlier if customer demand falls below our expectation for this summer, should it not obtain further liquidity lines.
We could lower the ratings further if we believe there is an increased risk of default in the next 12 months. For example this could occur if:
oTUI is not successful in obtaining further liquidity lines over the summer;
oTUI is unable to improve its solvency, likely through some equity injection, leading to increasing risk of interest forbearance, or the launch of a broader debt restructuring; or
oIf TUI can't refinance the EUR300 million senior unsecured notes over the next 12 months.
Ratings upside could build if, in our view:
oA stable macroeconomic and operating environment supports better business performance and the attainment of financial metrics as per our base case;
oThe capital structure proves sustainable in the longer term, demonstrated partly by a combination of reduced debt; material free cash flows; and a manageable and refinance-able debt maturity profile;
oThere is no liquidity pressure; and
oThere is no risk of default events occurring, including but not limited to, a purchase of the group's debt below par, debt restructuring, or interest forbearance.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
oCriteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
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
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oCriteria | Corporates | General: Corporate Methodology, 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: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
oGeneral Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
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