TEXT-S&P summary: Travelport LLC
S&P base-case operating scenario
In our base-case operating scenario, we see Travelport's revenues declining by about 2.3% in 2012, compared with 2011, as growth in the group's Global Distribution System (GDS) business is offset by the loss of its hosting contract with United Continental Holdings Inc. (B/Stable/--). In our view, Travelport's revenues from its GDS business will increase at a rate at about 2.6%, which is slightly lower than the International Air Transport Association's forecast passenger growth rate for 2012 of 3.5%. This is mainly because, in our opinion, the GDS business is likely to lose share as direct bookings with airlines increase.
We anticipate that gross margin pressure for Travelport will continue into 2012, as travel agents continue to push for larger shares of fees. However, we believe that Travelport will offset some of these pressures by offering wider product ranges and subscription-based services. Overall, we anticipate that the group's Standard & Poor's-adjusted EBITDA margin will remain relatively flat in 2012.
S&P base-case cash flow and capital-structure scenario Travelport's credit measures improved in 2011, with adjusted funds from operations (FFO) to debt increasing to 4.8% from 4.0% the previous year, and EBITDA interest coverage remaining at 1.7x. We anticipate that these ratios will weaken in 2012, mainly due to loss of revenues and profitability, as well as increased funding costs. Financing costs increased again in May 2012, as the group refinanced its August 2013 debt maturities with more expensive 1.5-lien debt.
While we consider the refinancing to be positive for our analysis of Travelport's liquidity, we believe that it will put additional pressure on cash flows. Therefore, under our base case, adjusted FFO to debt will decrease to less than 4% in 2012, while EBITDA interest coverage declines to 1.4x. Travelport will continue to generate positive free operating cash flow in 2012, in our view, due to low capital expenditures (capex) requirements, but this will be small in comparison with the group's overall debt burden and will not be adequate to improve its financial ratios.
We continue to assess Travelport's liquidity as "less than adequate" as defined in our criteria. This is driven by low covenant headroom and Travelport's weakened standing in the credit markets due to two selective defaults in the past three years. Over the 12 months to March 31, 2013, we forecast sources of liquidity to cover uses of liquidity by more than 1.5x.
Main sources of liquidity over the next 12 months include:
-- About $110 million of FFO;
-- $118 million available under committed credit facilities, although availability under these lines could be restricted by tight covenants; and
-- About $100 million of cash.
Main uses of funds over the period include:
-- About $20 million of negative working capital movements; and
-- About $75 million of capex.
Due to the extension of debt maturities in May 2012, Travelport now has no maturities until August 2014, when the group will face material refinancing needs.
We continue to consider covenant headroom to be tight, under our criteria, specifically, less than 15% under the tightest covenant.
The issue rating on Travelport's senior secured debt facilities is 'B', one notch above the long-term corporate credit rating on Travelport. The recovery rating on these facilities is '2', indicating our expectation of substantial (70%-90%) recovery prospects in the event of a payment default, although coverage on these facilities is at the low end of the range.
The issue ratings on Travelport's senior unsecured notes are 'CCC+', one notch below the rating on Travelport. The recovery ratings on the senior unsecured notes are '5', indicating our expectation of modest (10%-30%) recovery prospects in the event of a payment default.
The issue ratings on Travelport's various subordinated debt instruments are 'CCC', two notches below the rating on Travelport. The recovery ratings on these debt instruments are '6', indicating our expectation of negligible (0%-10%) recovery prospects in the event of a payment default.
Our ratings on the senior unsecured debt reflect our view that in the case of a hypothetical default, the value for the unsecured notes will derive from the nonguarantor group that resides mainly outside the U.S.
The recovery prospects for the senior unsecured notes and, more particularly, for the senior secured bank debt, are sensitive to the security package provided to the bank lenders, who benefit from collateral over the U.S. operations and guarantees from some foreign operating subsidiaries. This constrains the recovery prospects for the senior secured lenders, but at the same time, enhances the recovery prospects for the existing senior unsecured noteholders, who have access to the unpledged assets outside the U.S.
While we assume in our stressed valuation that the U.S. businesses comprise about 65% of the overall stressed value of the group, our recovery expectations, particularly for the senior secured debt, are sensitive to changes in this assumption. In the event that the value of the U.S. businesses in a default scenario is less as a proportion of the total stressed valuation than we anticipate, or that our overall stressed valuation is lower than we anticipate, the recovery prospects for the senior secured debt could fall to less than 70%. This could lead to our assignment of a lower recovery rating on the senior secured debt.
For our full recovery analysis see "Recovery Report: Travelport Recovery Rating Profile," published Nov. 16, 2011, on RatingsDirect on the Global Credit Portal.
The stable outlook reflects our view that, following the capital restructuring, liquidity is sufficient for Travelport to meet its investment and financing needs over the next 12 months.
We could lower the ratings in the event that an effective refinancing plan is not put in place one year in advance of the first-lien bank debt maturity in August 2014, as this, in our view, would weaken Travelport's liquidity position and make a payment default more likely.
The ratings could also come under pressure if Travelport's profitability were to fall, for instance due to a material decline in worldwide passenger numbers, or an increase in the number of airlines marketing flights themselves. We could also see the rating coming under pressure if the cost of debt were to increase to unsustainable levels during the refinancing process.
Given that Travelport remains highly leveraged, we view the potential for ratings upside as limited at present.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Recovery Report: Travelport Recovery Rating Profile, Nov. 16, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
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