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(The following statement was released by the rating agency)
Nov 16 -
Summary analysis -- Amadeus IT Holding S.A. ----------------------- 16-Nov-2012
CREDIT RATING: BBB-/Positive/A-3 Country: Spain
Primary SIC: Amusement and
Credit Rating History:
Local currency Foreign currency
14-Jun-2011 BBB-/A-3 BBB-/A-3
The ratings on Spain-based information technology (IT) service provider Amadeus IT Holding S.A. (Amadeus) primarily reflect Standard & Poor's Ratings Services' view of the group's "satisfactory" business risk profile and "intermediate" financial risk profile. Amadeus has solid market positions as an information technology (IT) service provider to the global travel industry, with leading positions in Europe and several emerging markets. The group also benefits from high barriers to entry in global distribution systems (GDS) and IT services, which operate under medium- to long-term contracts. It also has a continuously increasing market share in the GDS sector--currently at about 38%--and maintains industry-leading profit margins close to 40%, before adjustment for capitalized IT costs.
The ratings are constrained by Amadeus' exposure to the seasonal and cyclical travel industry. In addition, the GDS business is exposed to risks of disintermediation and continuous pressure from large clients, particularly airlines, to reduce booking fees.
We note that Amadeus derives less than 10% of its earnings from Spain. Our criteria states that the ratings on Amadeus should not therefore be capped by the sovereign rating on the Kingdom of Spain (BBB-/Negative/A-3). (See "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on RatingsDirect on the Global Credit Portal on June 14, 2011.)
S&P base-case operating scenario
We expect Amadeus' revenues and earnings generation to continue to benefit from market share gains in its GDS segment and from strong growth in its IT solutions segment, given the large number of of airlines to be migrated to Amadeus' "Altea Suite" passenger service system over the next 12-18 months. As a result, we expect the group's leverage, after our adjustments, to fall to about 2.1x by the end of 2012, compared with about 2.4x in 2011. We expect Amadeus' reported and unadjusted net leverage to reach 1.4x by year-end 2012--our main adjustments to the reported figures relate to capitalized IT costs.
In our view, the negative trend in consumer confidence will continue into 2013, negatively affecting traffic and GDS volumes. Under this assumption, we expect revenue growth to slow from 2012 levels. Consequently, we anticipate deleveraging to be more modest in 2013, not least because of increased focus on shareholder value, as demonstrated by the recently augmented dividend pay-out ratio. We forecast adjusted debt to EBITDA of 1.9x for the end of 2013.
S&P base-case cash flow and capital-structure scenario
Under our base case scenario we estimate that Amadeus will generate free operating cash flow (FOCF) of close to EUR500 million in 2012, thanks to an approximately 6% higher revenue base. This should result in sound discretionary cash flow, FOCF after dividends, of more than EUR300 million at the end of the year. We expect adjusted FOCF to debt to reach just over 25%.
For the year ending December 2013 we expect only a moderate increase in FOCF and slightly declining discretionary cash flow due to higher dividends. We forecast that adjusted FOCF to debt will increase to levels in the high twenties for the same period, supported by lower debt levels.
Amadeus' financial policy includes a public, unadjusted leverage target of less than 1.5x by the end of 2012 and a 40%-50% dividend payout target. We view this policy as supportive of investment-grade ratings.
We view Amadeus' liquidity as "adequate," as our criteria define the term We expect the group's liquidity sources including cash, funds from operations (FFO), and credit facility availability over the next 12 to 18 months to exceed its uses by more than 1.2x. Furthermore, even if EBITDA declined by 15%, we believe net sources would still significantly exceed cash requirements.
The group's current liquidity should benefit from:
-- Cash balances of about EUR391 million at the end of September 2012, most of which are in Spain and easily accessible;
-- Our view that Amadeus' free cash flows should adequately cover its mandatory debt amortization schedule over the next two years. The group generates sound free cash flow, helped by structurally positive changes in working capital. As of Sept. 30, 2012, the group had short-term liabilities of about EUR367 million compared with expected annual discretionary cash flow of more than EUR300 million;
-- Undrawn revolving credit facilities of EUR100 million maturing in May 2013 and EUR200 million in December 2014;
-- Satisfactory headroom under the current financial covenants for the existing senior loan indentures, which could, in our view, sustain a drop in EBITDA of more than 15% without being breached; and
-- Our view of Amadeus' sound relationship with banks and a satisfactory standing in credit markets.
Earlier this year, the group closed a EUR200 million nine-year European Investment Bank (EIB; AAA/Negative/A-1+) financing agreement, signed a new EUR200 million revolving credit facility with a 2.5 year maturity, and prepaid EUR350 million of its bridge loan due May 2013, thereby reducing the outstanding amount to EUR106 million.
The positive outlook reflects our view that Amadeus will likely further improve its credit ratios over the next 12 to 24 months thanks to its resilient free cash flow generation. We also believe the company will be supported by further market share gains in the GDS segment and continued strong growth in its IT solutions segment. We also anticipate that Amadeus will continue to pursue a moderate financial policy.
We might take a positive rating action if, under these circumstances, Amadeus achieved adjusted debt to EBITDA of 2.0x or less and a ratio of adjusted FOCF to debt of more than 25%.
We might revise the outlook to stable if weaker than expected operating performance delayed or reversed Amadeus' deleveraging trend. We could also revise the outlook if Amadeus' financial policy became significantly more aggressive than we currently expect, especially regarding acquisitions or shareholder returns, leading to weaker credit measures.
Related Criteria And Research
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009