oThe ongoing grounding of 737 Max aircrafts is harming Tui AG's tourism group profitability and cash generation longer than we expected and might weaken the group's resilience to withstand any further external shocks related to any further delays in resolving the grounding, Brexit, the uncertain development of the coronavirus outbreak, and potential weather-related factors.
oThe announced disposal of Hapag-Lloyd Cruises, when cashed in before September, will positively bolster the company's cash reserves ahead of the next seasonal working capital cycle and support during uncertain developments related to the coronavirus outbreak.
oThis transaction will also increase the financial leverage of an equity-accounted joint venture.
oWe are lowering our long-term issuer credit and senior unsecured debt ratings on Tui to 'BB-' from 'BB'.
oThe negative outlook reflects that we could lower the ratings over the next few months if the company's earnings and cash flows weakened beyond current expectations, the Boeing 737 Max grounding was again extended, the coronavirus spread in a way to jeopardize bookings, or the tour operation season was jeopardized by weather patterns, or the company failed to refinance its bond maturing in October 2021 at least 12 months before its maturity.
FRANKFURT (S&P Global Ratings) Feb. 28, 2020--S&P Global Ratings today took the rating actions listed above. The 737 MAX grounding is affecting the group's profitability and cash flow generation more than we anticipated.
Tui announced recently that 15 aircraft will remain grounded until the end of fiscal year 2019-2020 (Sept. 30). This is commensurate with our assumptions that the U.S. authorities will likely lift the grounding in the summer. The grounding will therefore affect Tui's earnings and operating cash generation during 2020, weakening the S&P Global Ratings-adjusted EBITDA margin to 8%-9% from 10.8% in fiscal 2018. While only about 10% of the company's fleet is affected, Tui is contracting a mix of dry-leased and more expensive wet-leased aircraft (including crews and maintenance) to replace this capacity to serve its owned hotels and booked capacities at third-party hotels.
The impact of the extended grounding is diminishing the group's headroom under the rating to withstand further shocks in an uncertain trading environment,
Because the return of the 737 Max aircraft to service depends on regulatory approvals, we see a risk of further delays. U.S. authorities are required to certify the aircraft type and will certify the simulator trainings for pilots. Afterward, we expect EU authorities to decide on the grounding. In addition, following the Brexit announcement, a new flight right scheme between the U.K. and EU is due before the end of 2020, should the two not agree to extend the interim period. While we believe that an agreement or extension will happen with no impact on airline operations, uncertainty remains. The same holds for our view on the coronavirus' impact on Tui's business. As of now, we expect only minimal impact but we also see a still-low likelihood event risk that the virus will spread further into Europe lowering tourists' willingness or ability to travel. Lastly, the variability of weather patterns poses a risk for the summer tour operation season, given that commitments on capacities are taken early in the year, as demonstrated in the 2018 season. While each of these risks in isolation have a low probability, they become material when taken together given the company's financial leverage, cash consumption, and cash-intensive business model.
The sale of Hapag-Lloyd Cruises will bolster the group's liquidity in light of the uncertain development of the coronavirus outbreak, although it releverages the Tui Cruises joint venture.
Tui has announced the sale of its expedition and luxury cruise line for net proceeds of EUR600 million-EUR700 million to the joint venture Tui Cruises. The company expects to receive proceeds before September. We believe that this sale would help cover the expected cash outflows after capital spending and dividends for the current fiscal year and supports Tui's liquidity over the next 12 months. At the same time, this transaction will increase leverage at the equity-accounted joint venture Tui Cruises, although not to an elevated level. While we understand that Tui Cruises funds itself on a stand-alone basis with incurred debt having no recourse to Tui AG, we also believe that the brand identity in the German market and material dividends received from Tui Cruise can be an incentive for Tui to support Tui Cruises in the hypothetical case of the latter's financial distress. Therefore, while we view positively the cash provided by the disposal, Tui is now exposed to a more leveraged joint venture company.
Although the group's financial leverage is still manageable, its cash flow-based ratios are weak for the rating.
Despite the grounding's negative impact on earnings and cash flows, we believe that Tui's net debt levels will not materially increase. Support will come from the disposal of Hapag-Lloyd Cruises, potential cash compensation from Boeing for the grounding, or any potential increase in customer bookings following the closure of competitor Thomas Cook. We expect S&P Global Ratings-adjusted funds from operations (FFO) to debt will likely reach 23%-25% in fiscal 2019-2020 after about 25% in fiscal 2018-2019 and 30% in fiscal 2017-2018. This corresponds to debt to EBITDA of about 3.1x for this fiscal year, with no material further negative impact from the introduction of the IFRS 16 lease accounting standard, because we already capitalize a similar amount of operating leases. However, these credit metrics are based on an equity accounting of the leveraged Tui Cruises joint venture. A proportionate consolidation of Tui Cruises would increase our leverage calculation by about half a turn. Still, the company's cash flow metrics such as adjusted free operating cash flow (FOCF) to debt and adjusted discretionary cash flow (DCF) to debt ratio are weak for the rating. The revised dividend policy will support the DCF to debt metrics somewhat from fiscal 2020-2021 onwards.
The refinancing of the bond maturing in 2021 at least 12 months before its maturity is an important rating expectation.
While we believe that the sale of Hapag-Lloyd Cruises will bring sufficient liquidity to sustain the material expected cash outflows after capital spending and material dividend payments during 2020, our rating factors in expectations that the bond maturing in October 2021 will be refinanced at least 12 months before maturity, in October 2020.
The negative outlook reflects the impact of the 737 Max grounding on Tui's earnings and cash flow generation profile and the array of risks affecting the industry. The outlook also reflects the not-yet-refinanced EUR300 million bond due in 2021.
We could lower the rating on the company over the next few months if earnings and cash flows weakened beyond expectations, the Boeing 737 Max grounding continued even longer compared with the current schedule, the coronavirus spread in a way that could jeopardize bookings, or the tour operation season was jeopardized by other consumer behavior or weather patterns, or if the company failed to refinance its bond maturing in October 2021 at least 12 months before its maturity.
We could revise the outlook to stable if Tui contained the deterioration of its earnings and cash flows with neutral reported FOCF generation after all lease payments and maintains FFO to debt well above 20%; the 737 Max grounding ended on schedule; the coronavirus did not affect meaningfully the company's results; and Tui had a successful summer tour operation season.
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oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
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