TEXT-S&P summary: Travelport LLC
Dec 19 -
Summary analysis -- Travelport LLC -------------------------------- 19-Dec-2012
CREDIT RATING: B-/Stable/-- Country: United States
State/Province: New Jersey
Primary SIC: Misc. business
Mult. CUSIP6: 87238C
Mult. CUSIP6: 89420K
Mult. CUSIP6: 89421E
Mult. CUSIP6: 89421H
Mult. CUSIP6: 89421J
Credit Rating History:
Local currency Foreign currency
14-Oct-2011 B-/-- B-/--
05-Oct-2011 SD/-- SD/--
21-Sep-2011 CC/-- CC/--
13-Sep-2011 CCC/-- CCC/--
17-Jul-2009 B-/-- B-/--
14-Jul-2009 SD/-- SD/--
02-Jun-2009 B-/-- B-/--
The ratings on U.S.-based Travelport Holdings Ltd. and its indirect primary operating subsidiary Travelport LLC (Travelport) reflect Standard & Poor's Ratings Services' view of the group's "fair" business risk profile and "highly leveraged" financial risk profile.
Travelport's business risk profile is constrained in our view by the seasonal and cyclical nature of the travel industry, competitive and consolidating nature of the sector, leading to competition on pricing and exposure to event risks. These factors are partly mitigated by the company's good market position and strong profitability.
The financial risk profile mainly reflects the company's high leverage and upcoming refinancing risks.
S&P base-case operating scenario
Despite modest growth in global travel trends in 2012, Travelport's operating performance has, in part, been negatively affected by the loss of the United Continental airline IT solutions contract. In the first nine months to Sept. 30, 2012, Travelport's revenue declined by about 1.5% to $1,545 million, from $1,570 million the year before. We expect the full-year revenue in our base-case to be around $2 billion, marginally lower than for full-year 2011.
Looking ahead, we anticipate that Travelport will see growing demand for its travel services in the strategically important Asia-Pacific and African markets. However, this positive development may be constrained by the trend of airlines to promote direct bookings in the more mature North American and European markets. The International Airline Transport Association (IATA) forecasts global passenger growth for 2013 to be 3.9%.
Under our base case, we anticipate that Travelport's gross margin will remain under pressure in 2012 and 2013 as travel agents continue to push for larger shares of the fees. However, at the same time we believe that Travelport will offset some of these pressures by offering wider product ranges and subscription-based services. Although we expect the operating base to be smaller due to the loss of the United Continental hostings contract, we expect the group's Standard-&-Poor's-adjusted EBITDA margin to remain relatively flat in 2012.
S&P base-case cash flow and capital-structure scenario
Travelport's credit metrics remain weak in the 12 months to Sept. 30, 2012; with Standard & Poor's-adjusted funds from operations (FFO) to debt at 4.9%, compared with 4.5% in the previous year; and EBITDA interest coverage declining to 1.6x from 1.7x. Under our base-case scenario, we expect these ratios to remain weak in 2013, due to the loss of revenue and profitability and, in particular, due to increased funding costs.
Earlier this year, the group refinanced its August 2013 debt maturities with more expensive 1.5-lien debt, and has recently approached lenders with another amendment request that would, among other things, provide it with flexibility to address debt due in 2014. In our opinion, another refinancing round would increase funding costs materially, to such an extent that operating cash flows could be substantially reduced. Under our base case, we expect the group's operating cash flow in 2012 to be mainly supported by relatively modest capital expenditure (capex) of around $80 million. However, in our opinion, if the company were to refinance its 2014 debt maturities in the near future at a significantly higher cost this could have a significantly negative impact on its cash flow generation in the future.
We view 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 capital markets due to two selective defaults in the past three years.
Over the 12 months to Sept. 30, 2013, we forecast sources of liquidity to cover uses of liquidity by more than 1.5x.
The main sources of liquidity over the next 12 months include:
-- About $130 million of FFO;
-- About $46 million available under committed credit facilities, although availability under these lines could be restricted by tight covenants. In line with our criteria, we exclude credit facilities expiring within a 12-month period;
-- About $125 million of cash.
The main uses of funds over the period include:
-- About $3 million of negative working capital movement;
-- About $88 million of capex.
Due to the extension of debt maturities in May 2012, the group has no maturities until September 2014, when it faces substantial refinancing needs. We continue to consider covenant headroom to be tight under our criteria; specifically, less than 15% under its 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 '1', indicating our expectation of very high (90-100%) recovery prospects in the event of a payment default.
The issue ratings on Travelport's senior unsecured notes are 'CCC+', one notch below the rating on Travelport, and the recovery ratings are '5', indicating expectation of modest (10%-30%) recovery prospects in the event of a payment default.
The issue ratings on Travelport's 1.5 Lien and second lien debt facilities, subordinated notes, and PIK loans are 'CCC', two notches below the corporate credit rating on Travelport. The recovery ratings are '6', indicating our expectation of negligible (0%-10%) recovery prospects in the event of a payment default.
For our full recovery analysis see "Recovery Report: Travelport Recovery Rating Profile" published today.
The stable outlook reflects our view that, following the capital restructuring earlier this year, 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 in place one year in advance of the maturity of the senior unsecured notes in September 2014, as this, in our view, would weaken Travelport's liquidity position and make a payment default more likely. We could also consider a downgrade if we believe that financing costs will increase materially at the time of such a refinancing--to such an extent that we believe it will reduce operating cash flows substantially.
Given that Travelport's capital structure remains complicated and highly leveraged, we view the potential for ratings upside as limited at present.
Related Criteria And Research
-- Use Of Creditwatch And Outlooks, Sept. 14, 2009
-- Recovery Report: Travelport Recovery Rating Profile, Dec. 19, 2012
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009