July 11, 2014 / 3:55 PM / in 4 years

Fitch Affirms Thomas Cook Group at 'B'; Outlook Positive

(The following statement was released by the rating agency) LONDON, July 11 (Fitch) Fitch Ratings-London-9 July 2014: Fitch Ratings has affirmed Thomas Cook Group Plc's (TCG) Long-term Issuer Default Rating (IDR) at 'B' with a Positive Outlook. Fitch has also affirmed the senior unsecured notes issued by Thomas Cook Finance plc at 'B+'/ 'RR3'. The affirmation is based on improved profitability in 2013 and the significant cost cutting conducted since the appointment of the new management team. Fitch expects operating margins to remain resilient in FY14, despite a competitive UK travel operator environment. However, funds from operations (FFO) lease-adjusted gross leverage increased to 7.6x at the financial year to September 2013 from 6.1x at FY12, as continued restructuring costs drove FFO lower. The group's financial flexibility should, nevertheless, improve on the back of such recent and future cost-cutting measures and improved free cash flow generation. As a result, Fitch expects material de-leveraging over the next two years (3.5x by FYE16) as reflected in the Positive Outlook. KEY RATING DRIVERS Competitive, Low Margin Industry Competition in the sector remains keen, notably from low-cost airlines and the constant growth of online companies such as Expedia.com. TCG's UK bookings were down 1% in 1H14, despite competitive selling prices. Against a target on-line penetration rate of 50% for bookings by 2015, TCG's on-line bookings only rose to 38% of total bookings (from 36% at September 2013), suggesting that TCG, despite its strong brand name, is yet to be identified as a first-call online brand. Refinancing Complete The upgrade to 'B' from 'B-' in November 2013 followed the completion of TCG's GBP1.6bn refinancing plan. This refinancing extended bank maturities from 2015 to 2017 and prefunded the repayment of the 2015 EUR400m senior unsecured notes. This has improved, and is expected to continue supporting, TCG's financial flexibility. Turnaround Plan, Improved Trading TCG's turnaround plan is designed to improve profitability by GBP460m (revised upwards from GBP440m) by end-2015 (expected to deliver benefits of GBP140m and GBP320m cost cutting and efficiency improvements group-wide). 1HFY14 results (LFL EBIT improved GBP77m to GBP274m on an LTM basis) confirmed the positive trend with the LTM March 2014 operating margin rising to 3% (2.8% at FYE13 and 1.6% at FYE12). However, TCG had to pay out around GBP132m of one-off costs in FY13 in respect of the cost-out programme, with the re-organisation of the UK retail structure (including the closure of over 190 shops) costing GBP28m. A further GBP150m of benefits has now been identified, under the ("Wave 2 programme"). This is part of the overall benefits of GBP400m expected to be achieved by end-2018 under this programme. There are execution risks, but we note the largely complete first round of cost cutting totalling GBP194m achieved to date under Wave 1. Further Efficiency Measures In addition to cutting costs, TCG is implementing efficiency measures such as reducing the number of travel brands to 30 from 85, strict capacity management, IT systems integration and standardisation, simplifying management structures and recruiting skilled omni-channel/ on-line staff. It is also improving its product offering through enhanced yield management, airline capacity optimisation and hotel procurement to increase operating margins. Strong Brand Name The ratings continue to benefit from the strong brand name, geographical diversification of its customer base and end-destinations, dynamic new management, a cost-cutting and re-organisation programme, improved working capital management and IT systems rationalisation and simplification. Fuel and FX risks TCG's cost base is exposed to avgas price movements and to currency fluctuations, through a strengthening of the USD and the EUR against GBP. Fitch expects fuel costs to remain stable in 2014, due to the likelihood of only moderate fuel price increases. Seasonality and Leverage Working capital typically increases by up to GBP700m between September to December, due to this being a quieter holiday period and higher marketing costs for the summer season. Group-adjusted FFO gross leverage was 7.6x at FYE13, and is forecast to rise to 9.3x in December 2014, due to such working capital swing of GPB700m from peak to trough. Fitch, however, expects TCG's credit metrics to improve in 2014, due to both asset disposals and lower cash restructuring costs during the year. Asset Disposals Support Deleveraging In FY13 and 1H14, TCG sold GBP63m of non-core assets (including the group's share in the UK NATS air traffic control system for GBP38m), using the proceeds to pay down debt and improve financial flexibility. Improved Credit Metrics Fitch expects the operational restructuring to drive profitability and free cash flow (assuming no dividends), therefore resulting in enhanced interest cover and leverage metrics. Adjusted leverage (including the intra-year GBP700m working capital swing) should fall to below 4.0x by FYE16 from a forecasted 5.3x at FYE14. RATING SENSITIVITIES Positive: Future developments that could, individually or collectively, lead to positive rating actions include: -Improvement of the group's operating margin towards 4% resulting from a successful evolution of its business model as an omni-channel online tour operator and a leaner cost structure -Lease adjusted FFO gross leverage (including GBP700m for working capital changes) below 5.0x on a sustained basis -Generating positive free cash flow (including restructuring and exceptional costs) on a sustained basis -Lease-adjusted EBITDAR/gross interest plus rents above 2.5x (FYE13: 1.8x) on a sustained basis -Liquidity headroom of at least GBP300m (FYE13: GBP300m) Negative Future developments that could, individually or collectively, lead to negative rating actions include: -Lease-adjusted EBITDAR/gross interest plus rents below 1.5x on a sustained basis -Group operating margin below 2.5% reflecting increased competitive headwinds or a larger- than-expected impact from a slowdown in consumer confidence -Lease adjusted FFO gross leverage (including GBP700m for working capital changes) above 7.0x on a sustained basis -Liquidity headroom below GBP200m Contact: Principal Analyst Ishani Goonasekera Associate Director +44 20 3530 1509 Supervisory Analyst Jean-Pierre Husband Director +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chair Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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