TEXT-S&P revises Sabre Holdings 'B' rating outlook

Wed Apr 25, 2012 2:37pm EDT

Overview	
    -- U.S.-based travel technology provider Sabre Holdings Corp. plans to 	
extend a portion of its significant 2014 maturities through a combination of 	
term loan extension and secured notes issuance. 	
    -- We are assigning the extending term loan and new secured notes an 	
issue level rating of 'B' and a recovery rating of '3'.	
    -- We are also revising our 'B' rating outlook on the company to positive 	
from stable.	
     -- The positive outlook indicates the possibility of a rating upgrade if 	
Sabre Holdings can satisfactorily resolve its litigation with airlines and 	
maintain its EBITDA margin.	
	
Rating Action	
On April 25, 2012, Standard & Poor's Ratings Services revised its rating 	
outlook on Southlake, Texas-based Sabre Holdings Corp. to positive from 	
stable. The corporate credit rating was affirmed at 'B'.	
	
At the same time, we are assigning the company's proposed extending term loan 	
due Dec. 29, 2017 and the $400 million secured notes due 2019 an issue-level 	
rating of 'B' (at the same levels as our 'B' corporate credit rating on the 	
company) and a recovery rating of '3'. The '3' recovery rating indicates our 	
expectation of meaningful (50%-70%) recovery for debtholders in the event of a 	
payment default. 	
	
Rationale	
The outlook revision to positive is based on Sabre's plan to extend a portion 	
of its significant 2014 maturities through a combination of term loan 	
extension and secured notes issuance. The proposed transactions would reduce 	
Sabre Holdings' 2014 maturities to nearly $1 billion--a figure that involves 	
significantly less refinancing risk. The revision also considers the company's 	
steady operation performance.	
	
Our 'B' rating on the company incorporates our assumption of fairly stable 	
operating performance, despite the company's ongoing dispute with one of its 	
airline customers, and competitive pressure at its online travel agency, 	
Travelocity. We expect that growth in the travel market will more than offset 	
the specific weakness that Sabre is currently experiencing.	
	
We assess the company's business risk profile as "fair" (based on our 	
criteria), reflecting its market-leading position in travel distribution in 	
the U.S. and growing demand for travel-related services. We view Sabre's 	
financial risk profile as "highly leveraged," as debt leverage remains high, 	
in the mid-5x area, and the company faces significant debt maturities in 2014. 	
Sabre has made significant progress extending its 2014 maturities to $1.7 	
billion from about $3 billion. The proposed transactions would lower its 2014 	
maturities to near $1 billion. We believe it is highly likely that the company 	
will be able to refinance its remaining 2014 maturities prior to them becoming 	
current. 	
	
Sabre's business includes global distribution systems (GDS) that travel agents 	
and corporations use, software for travel providers, and online travel agency 	
(OTA) Travelocity. Sabre Holdings is a major provider of marketing and 	
distribution services to the travel industry.	
	
The company owns one of the largest GDSs. A GDS is an intermediary between 	
travel suppliers (airlines, hotels, car renters, cruises, etc.) and travel 	
agencies, OTAs, and corporations. As such, it gathers inventory (seats, rooms, 	
etc.) from those suppliers. The company generates revenues from booking fees 	
paid by travel suppliers and fees charged for hardware and software used by 	
agencies. As the global travel market rebounds from a low point in 2009, the 	
GDS business has been registering very healthy increases in transaction 	
volume. Even though the GDS market is fairly well consolidated with three 	
major players, the market is highly competitive and some of its customers 	
(commercial airlines) have begun to exert pressure on fees and to push for 	
alternative distribution platforms. 	
	
Sabre's software business also has been growing at a healthy rate, as airlines 	
seek to cut costs and increase productivity. Software is the fastest-growing 	
business unit within Sabre Holdings. Travelocity has been experiencing 	
competitive pressure from Priceline.com Inc. and Expedia Inc. at the same time 	
that it executes an internal technology platform integration. 	
	
Sabre Holdings' litigation with AMR Corp. (American Airlines Inc.'s parent 	
company) is ongoing, despite AMR's bankruptcy filing on Nov. 29, 2011. The 	
litigation began in 2011 when AMR filed an antitrust lawsuit against Sabre and 	
its competitor  as part of AMR's effort to directly connect with online travel 	
agencies (such as Orbitz Worldwide Inc. and Expedia Inc.), bypassing GDSs. 	
Shortly thereafter, Sabre filed a counter-claim against AMR. For a time, this 	
led to American Airline tickets no longer being available to several online 	
travel agencies. There is currently a temporary agreement in place that 	
ensures that American Airlines tickets are available through Sabre through the 	
end of the litigation. 	
	
If American Airlines is successful in bypassing GDSs and the practice becomes 	
widely adopted by other airlines, it could have significant negative revenue 	
and profit implications for all GDSs. Sabre generates a significant portion of 	
its revenues connecting OTAs and airlines. We recognize that this is not the 	
first time airlines have attempted to bypass or pressure GDSs in an effort to 	
lower airline distribution costs, but it is the most aggressive attempt to 	
date. We will watch these developments and the litigation closely. 	
	
For 2012, we are anticipating low- to mid-single-digit percentage revenue 	
growth and mid-single-digit percentage EBITDA growth driven by the company's 	
software business, with the EBITDA margin flat to up slightly. Since its 2007 	
acquisition by Silver Lake Partners and Texas Pacific Group, Sabre has not 	
publicly disclosed its financial results, with the exception of its 2008 	
results. In the first quarter of 2012, revenues and EBITDA grew moderately, 	
fueled by increased travel transaction volume and passengers boarded. Pro 	
forma for the term loan extension and secured notes issuance, Sabre's debt 	
leverage was in the mid-5x area, down from close to 9x at the end of 2008. 	
Over the same period, EBITDA coverage of interest increased to the mid-2x 	
area, up from 1.7x at the end of 2008. We expect credit ratios will improve 	
modestly in 2012 as a result of EBITDA growth. 	
	
Sabre generates good discretionary cash flow, which it has used to reduce debt 	
and fund acquisitions. Working capital typically represents a moderate use of 	
cash flow. Capital expenditures are a more significant use of cash, especially 	
with the growth of its software business. We expect that discretionary cash 	
flow will be down slightly from current levels in 2012 due to higher interest 	
costs and higher capital expenditures. 	
	
Liquidity	
Sabre has adequate liquidity to cover its needs over the next 12 months. Our 	
view of the company's liquidity profile incorporates the following 	
expectations: 	
     -- We expect the company's sources of liquidity over the next 12 to 18 	
months to exceed its uses by more than 1.2x. 	
     -- We expect that cash sources would remain positive, even with a 15% 	
EBITDA decline.	
     -- We expect that the company would be able to maintain covenant 	
compliance even with a 10% decline in EBITDA. If the margin of compliance 	
narrows to less than 10%, we believe that the company would be able to obtain 	
necessary waivers and amendments from its bank group.	
	
Liquidity sources include cash, substantial availability under both Sabre's 	
$249 million revolving credit facility due March 2013 and its $251 million 	
extended revolving credit facility due September 2016, and our expectation of 	
discretionary cash flow in excess of $100 million. 	
	
Sabre is subject to a net secured debt leverage covenant. The company 	
currently has a sufficient margin of compliance with the leverage covenant. 	
However, we expect that the margin of compliance could narrow in the third 	
quarter of 2012 as the leverage covenant steps down. We believe that Sabre 	
would be able to obtain necessary waivers and amendments from its bank group 	
if it becomes necessary.	
	
Outlook	
The rating outlook is positive. Still, the company's contract disputes and 	
litigation with its airline customers remain a risk factor in the rating, 	
especially if this leads to a disruption of the GDS business model. If the 	
airline litigation is satisfactorily resolved and we become convinced that 	
airlines will not be successful in circumventing GDSs and that the company can 	
sustain its EBITDA margin and reduce its sizable 2014 maturities to less than 	
$1 billion, we could raise the rating. On the other hand, if the airlines are 	
able to disintermediate GDSs, leading to margin deterioration, or if Sabre is 	
unable to make meaningful progress in refinancing its sizable 2014 maturities 	
well in advance of them coming due, we could revise the outlook to stable.	
	
Related Criteria And Research	
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011	
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009	
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 	
Credits, May 13, 2008	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008	
	
	
Ratings List	
	
Ratings Affirmed; Outlook Action	
                                  To               From	
Sabre Holdings Corp.	
 Corporate Credit Rating          B/Positive/--    B/Stable/--	
 Senior Secured                   B	
   Recovery Rating                3	
 Senior Unsecured                 CCC+	
   Recovery Rating                6	
	
New Ratings	
	
Sabre Holdings Corp.	
 Extending term loan due 2017     B	
   Recovery Rating                3	
 $400M secd nts due 2019          B	
   Recovery Rating                3