S&P GLOBAL, INC.
oWe expect travel and other COVID-19 restrictions across the globe will lead to about a 60% drop in passengers at
oWe expect ADP to implement offsetting measures to partially mitigate our expectations of revenue declining to about
oHowever, we believe these offsetting measures will not be sufficient to sustain ADP's credit metrics. We expect average funds from operations (FFO) to debt will fall toward 10%-11% in 2021-2022 from the 13% we previously anticipated.
oWe are therefore revising ADP's stand-alone credit profile (SACP) down by one notch to 'a-'. We are affirming our 'A' issuer and issue ratings, reflecting a one-notch uplift given our view of a moderate likelihood of extraordinary support from the French state.
oThe negative outlook reflects the risk that we could lower the ratings by one notch if the company is unable to maintain adjusted FFO to debt above 10% in 2021-2022, reflecting uncertainty about air traffic recovery and the lack of visibility on the next few years' regulatory tariffs and level of capex.
We revised ADP's SACP by one notch to 'a-' to reflect our view that a prolonged recovery in traffic will further weaken its cash flow and credit metrics over the next two-to-three years. We have revised our forecasts for ADP and we now expect a sharper traffic decline in 2020 compared to 2019 (down 60% compared to the 25% decline we previously assumed). We also forecast a slower recovery, with passenger numbers returning to 2019 levels in 2023 or 2024. The revised forecasts are in line with our view of the sector (see "Airports Face A Long Haul To Recovery," published on
We expect ADP's total revenues to decline by about 50%-55% in 2020 to
We now expect FFO to debt to fall toward 10%-11% on average in 2021-2022. ADP's acquisitive strategy, which saw it purchase
That said, we believe that the company has sufficient liquidity to sustain the cash flow shortfall this year and its 2020 credit metrics will not reflect its long-term credit quality. ADP's airports in
The request to terminate the 2016-2020 ERA offers an immediate relief to ADP's large capex plan and is as a key mitigant against the large cash flow shortfall. The ability of ADP to maintain FFO to debt above 10% will notably depend on how traffic recovers but also on the feasibility of mitigating actions. In our base case we include the state furlough scheme to offset staff costs in 2020, dividend cuts until 2022, no further acquisitions in 2020/2021, and some reduction in maintenance and consumptions costs. However, we see the requested termination of the 2016-2020 ERA framework and the announced termination of the public consultation for the 2021-2025 ERA as one of the key actions to promptly scale down the company's previous ambitious capex plan. We forecast that annual capex could decline to about
In the context of the pandemic, on
We are not reflecting any tariff increase in our forecasts in 2021-2022 as uncertainty remains about the regulatory package in the new ERA. Instead, ADP will submit a proposed tariff and capex plan to the Transport Regulatory Body (ART) annually, which reduces visibility over the next few years. There could therefore be some upside if ADP's tariff framework beyond 2023 supports its credit metrics; in the short term we think that financially struggling airlines may be reluctant to absorb tariff increases.
In our view, the large extraordinary support from the French government to the aviation sector provides indirect support to ADP. The
The fact that the government agreed to cancel the dividend distribution for the next two years is also a supporting measure.
Therefore, we continue to assess ADP as playing an important role in the French state, which owns a 50.6% stake. Following our revision of the SACP to 'a-', this is now reflected in a one-notch uplift to arrive at our 'A' rating on ADP.
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.
Environmental, social, and governance (ESG) credit factors for this credit rating change:
oHealth and safety
The negative outlook on ADP reflects uncertainty over future airlines' capacity and passengers' willingness to travel, combined with weaker economic conditions. These factors drive our assumption of a generally lengthier recovery, which could be further exacerbated by any potential second waves of COVID-19.
The negative outlook reflects the risk of ADP's weaker-than-expected credit metrics following the coronavirus outbreak and indicates a one-in-three chance we could lower the ratings if the company is unable to sustain ratings-commensurate credit metrics, notably adjusted FFO to debt above 10% on a sustainable basis.
In our view, we would lower the rating by one notch if the following materialize:
oThe company does not execute the planned mitigating actions in good time;
oEconomic recovery is slower or more prolonged than we anticipate or there are long lasting effects on air travel from the recessionary macroeconomic backdrop; and/or
oThe group continues to undertake debt-funded M&As.
All other things being equal, we could lower the rating on ADP by one notch if we lower the sovereign rating on
We could revise the outlook to stable if:
oTraffic shows a strong and sustainable path of recovery and the risk of a further outbreak is reduced;
oThe group makes progress in implementing the mitigating actions by the end of the year, supporting weighted average FFO to debt sustainably above 10%; and/or
oThere is evidence of a supportive regulatory agreement, with visibility, for example, on future tariffs and capex.
All other things being equal, a revision of the outlook on ADP to stable would also be conditional on a stable outlook on the French sovereign rating.
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oAirports Face A Long Haul To Recovery,
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