oTUI launched a EUR1.1 billion capital increase that will bolster its liquidity ahead of the winter tourist season, which see as a step to address the group's highly leveraged capital structure, given the proceeds would be used to repay debt.
oPent-up demand for leisure travel is materializing in an uptick in bookings for TUI, although the group will continue to operate at reduced capacity for several quarters.
oWe have therefore raised our issuer credit and issue ratings on TUI and its debt to 'B-' from 'CCC+'.
oThe outlook is stable because we expect TUI will report EUR1.3 billion-EUR1.5 billion EBITDA and EUR250 million-EUR300 million free operating cash flow (FOCF) after lease payments in 2022, which will help the group maintain adequate liquidity and reduce its adjusted debt to EBITDA toward 5.0x-6.0x.
PARIS (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above. With its EUR1.1 billion equity raise, TUI is bolstering its liquidity ahead of the winter tourist season and taking steps to address its highly leveraged capital structure.
On Oct. 6, TUI launched a fully underwritten capital increase to raise gross proceeds of EUR1.1 billion, which it will use to repay part of its revolving credit facilities (RCFs) from KfW, German state-owned development bank. We understand that TUI might not immediately cancel the respective commitments, because its priority is to strengthen liquidity ahead of the winter season, when the group's working capital requirements typically consume cash. Earlier this year, TUI extended the maturity of its EUR4.8 billion RCFs to 2024, thus reducing refinancing risk and increasing its liquidity buffer. It had also raised EUR590 million of convertible bonds and disposed of the real estate property of its RIU hotels, with proceeds of about EUR540 million (excluding earn-outs in later years). Together with positive FOCF in the third and fourth quarters of fiscal 2021 (ended Sept. 30), these proceeds allowed the group to reduce RCF drawings by EUR1.3 billion in the fourth quarter of FY2021.
TUI is also considering a capital markets transaction, including a senior unsecured bond issuance, to extend its debt maturity profile. We view these as positive steps toward a more sustainable capital structure. As of June 30, 2021, TUI had about EUR5.9 billion of interest-bearing debt, including EUR3.2 billion of drawn RCF, EUR590 million of convertible bonds (pro forma the EUR190 million tap in July), EUR1.1 billion of silent cash pay participation facilities that we view as akin to debt, and EUR1.0 billion of asset financing and other financial debt. Adding lease and pension debt, total S&P Global Ratings-adjusted debt was nearly EUR10 billion. Pro forma the above-mentioned transaction, S&P Global Ratings-adjusted debt would reduce to EUR7.5 billion (EUR3.5 billion of cash-pay financial debt and EUR4 billion of lease and pension liabilities).
We expect bookings will continue to ramp up, supported by pent-up consumer demand and the effects of the vaccine campaigns.
TUI's bookings for the summer season (June to October) reached 5.2 million by early October, showing a strong uptick in the last few weeks. Yet capacity remains 50%-60% of FY2019 capacity, hampered in particular by the U.K. government's traffic light system that limited U.K. departures. For the winter season, although bookings are above 1.0 million, these are still 46% lower than FY2019 bookings, with TUI expecting to operate at 60%-80% capacity versus FY2019 levels. Long-haul destinations or destination countries with lower vaccination rates, such as Turkey, are expected to recover more slowly because of travel restrictions or lower demand. Volumes will likely not approach pre-pandemic levels before the second half of April-September 2022, and could be further depressed by renewed or prolonged travel restrictions.
Although we estimate TUIwill report EBITDA and cash flows that are meaningfully negative in FY2021, short-term bookings led to a gradual increase in revenue and subsequent working capital inflow in the second half of the year. In our base case, we expect that trend to continue, such that TUI reports positive EBITDA and FOCF after lease payments in FY2022, albeit displaying standard cash flow seasonality within the year. We believe the leisure travel sector is showing signs of recovery and has potentially reached an inflection point. Yet, we still expect that the leisure hospitality industry will not fully normalize and recover to pre-pandemic credit metrics before 2023.
We believe TUI has sufficient liquidity over the next 12 months, even if recovery is slower than we currently expect.
TUI had about EUR3.4 billion of liquidity on Oct. 4, 2021, including cash on balance sheet (net of restricted cash) and available RCFs. The equity raise will further enhance liquidity, until the group cancels the undrawn RCF commitments. To put this number into context, when TUI's operations were completely suspended, total cash burn was about EUR400 million per month. The group's liquidity typically reaches a low point in December after settling supplier payments, then progressively increases as summer holiday bookings are cashed in. In FY2022, we expect working capital requirements to be lower in the first quarter than what they were before the pandemic, because of lower volumes. In our base case, we anticipate a liquidity requirement of EUR1.0 billion-EUR1.5 billion in the first quarter of FY2022 (ending Dec. 31, 2021), which is mainly covered by the rights issue proceeds.
TUI has historically received booking pre-payments about three to six months prior to paying hotels, as travelers book their holidays well in advance. Over the last few years, this business model has led to material cash inflows in the second half of the fiscal year, followed by cash outflows during the first half. We note the risk of a potential change in customer booking behavior, should travelers decide to book closer to the travel date out of uncertainty regarding COVID-19 mobility restrictions. Currently, across the industry, customers this summer were booking 10-14 days in advance with short-term changes of travel advice, versus the three-to-six months before the pandemic. We believe this could exacerbate TUI's working capital needs if this trend remains.
Government aid has supported the issuer credit rating.
The German government has given TUI three bail-out packages totaling EUR4.3 billion to date. The German government's extraordinary and timely support provided so far has enhanced TUI's liquidity and broadly explains our issuer credit rating on the company. We also now view TUI as a government-related entity (GRE). However, we see a low likelihood that, beyond the existing stabilization packages, TUI would receive further extraordinary support from the German government under a future stress scenario. Despite the government support over the past few months, we consider that TUI's role for and its link with the German government remains limited.
The stable outlook reflects our expectation that pent-up demand for leisure travel and recovery in international travel, at least within Europe, will translate into positive EBITDA of EUR1.3 billion-EUR1.5 billion and FOCF after lease payments of EUR250 million-EUR300 million for TUI in FY2022. This will help the group maintain adequate liquidity and reduce its S&P Global Ratings-adjusted debt to EBITDA toward 5.0x-6.0x.
The stable outlook also incorporates our view that the German government and KfW would have a constructive approach toward TUI's capital structure in case the sector's recovery was delayed.
We could lower the rating within the next 12 months if the booking pattern falls below our base-case expectations because of renewed or prolonged travel restrictions, such that TUI's earnings remain depressed compared with pre-pandemic levels and its FOCF after lease payments does not turn positive. This could weaken its liquidity position and lead us to consider its capital structure as unsustainable.
We see an upgrade as unlikely in the next 12 months because of TUI's high debt burden and the meaningful intrayear working capital swings inherent to its business model. We could upgrade TUI if the company demonstrates a sustainable recovery in revenue and a track record of positive FOCF, such that it deleverages comfortably below 5x with meaningful FOCF to debt consistently well above 10%.
Related Criteria
oGeneral Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
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: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
oCriteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
oGeneral Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, 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: Principles Of Credit Ratings, Feb. 16, 2011
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.
.
S&P GLOBAL, INC. 
