-- 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
-- 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.
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
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
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.
Sabre has adequate liquidity to cover its needs over the next 12 months. Our
view of the company's liquidity profile incorporates the following
-- 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%
-- 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.
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 Affirmed; Outlook Action
Sabre Holdings Corp.
Corporate Credit Rating B/Positive/-- B/Stable/--
Senior Secured B
Recovery Rating 3
Senior Unsecured CCC+
Recovery Rating 6
Sabre Holdings Corp.
Extending term loan due 2017 B
Recovery Rating 3
$400M secd nts due 2019 B
Recovery Rating 3