(The following statement was released by the rating agency)
May 14 -
-- We expect higher recovery prospects for German Tourism Group TUI in an event of default and we expect that some of the cash currently on balance sheet will be used to pay the upcoming debt maturities.
-- We are revising our recovery rating on TUI's EUR300 million perpetual subordinated notes to '5' from '6' and raising the issue rating on this instrument to 'CCC' from 'CCC-'.
-- The 'B-' corporate credit rating and stable outlook on TUI are not affected by this action and remain unchanged.
On May 14, 2012, Standard & Poor's Ratings Services revised its recovery rating on TUI AG's EUR300 million perpetual notes to '5' from '6'. The issue rating on these notes was raised to 'CCC' from 'CCC-'. The 'B-' corporate credit rating and stable outlook on TUI are not affected by this action and remain unchanged. The issue rating on TUI's unsecured debt was affirmed at 'B-' and the '3' recovery rating on these notes is unchanged.
Our revision of the recovery rating on the perpetual subordinated notes reflects our expectation of higher recovery prospects on the notes at the point of default, following some recent debt repayments. Further, we expect that some of the cash currently on balance sheet will be used to pay the upcoming debt maturities.
The revision of the recovery rating resulted in our raising the issue rating to 'CCC' from 'CCC-'.
The ratings on German tour operator TUI AG reflect our view of the group's 'highly leveraged' financial risk profile and 'weak' business risk profile.
The ratings are constrained by TUI's limited access to cash flows of its fully consolidated subsidiary, TUI Travel PLC (not rated), based on a 56% control of the voting rights despite a legal ownership of only 35%. Exposure to the cyclical and low-margin tourism industry, which is highly exposed to event risks, is also a drag on the ratings.
TUI's market-leading position in European tourism and geographically diverse sales only partly offset these weaknesses, in our view.
We now assess TUI's liquidity as 'adequate', under our criteria, following the partial sale of shipping associate Hapag-Lloyd Holding AG (BB-/Negative/--). This transaction, which we understand has cleared all legal hurdles, will reduce TUI's 39.5% stake in Hapag-Lloyd to 22.1% by June 29, 2012. As part of the transaction, TUI has already received EUR225 million in return for repayment and partial sale of the EUR350 million Hybrid II that TUI had provided to Hapag-Lloyd in 2009. TUI will receive another EUR475 million on June 30, 2012, following disposal of a 17.4% equity stake in Hapag-Lloyd to the Albert Ballin consortium, in which the City of Hamburg is the largest shareholder, with 41%.
As a holding company, TUI has no direct access to its major operating subsidiaries' cash flows. We therefore examine TUI's own sources and uses of liquidity for our assessment. For the next 12 months, we estimate that TUI's liquidity sources cover its uses by more than 1.2x.
TUI's liquidity sources as of Dec. 31, 2011, comprised EUR624 million in cash. Since then the company has received EUR225 million in cash related to the Hapag-Lloyd transaction and repaid EUR123 million of financial debt obligations. Debt maturities for the next 12 months include EUR233 million senior fixed-rate notes due in December 2012. A further EUR319 million from the exchangeable bond will mature in April 2013, following which TUI's legal ownership in TUI Travel will increase to about 48% due to the release of TUI Travel shares underlying the exchangeable bond.
Following the partial disposal of Hapag-Lloyd, TUI has about EUR680 million of equity tied up in Hapag-Lloyd. TUI is entitled to sell this remaining stake to a third-party investor or to request an IPO from Hapag-Lloyd. Due to the related uncertainty of timing and purchase price, we do not factor any further reduction in TUI's Hapag-Lloyd stake into our analysis.
While there are no financial covenants in the documentation governing TUI's debt, TUI Travel's syndicated loan facilities limit net debt to EBITDA at 3.0x and fixed-charge coverage at more than 1.5x. We estimate that as of Dec. 31, 2011, TUI Travel's headroom under these covenants exceeded 15%.
We have revised our recovery rating on TUI's EUR300 million perpetual subordinated notes to '5' from '6'. The recovery rating of '5' indicates our expectation of modest (10%-30%) recovery in the event of a payment default. We also raised the issue rating on the subordinated notes by one notch to 'CCC' from 'CCC-'. The issue rating is two notches lower than the long-term corporate credit rating on TUI. The downward notching is greater than the standard one notch under our recovery rating scale because of the optional deferability of interest of the perpetual notes.
Our revision of the recovery rating on the perpetual subordinated notes reflects our expectation of higher recovery prospects on the notes at the point of default, following some recent debt repayments. Further, we expect that some of the cash currently on the balance sheet will be used to pay the upcoming debt maturities. Even if recovery prospects could be numerically higher than the 10%-30% range indicated by the recovery rating, the recovery rating is limited in our view by the deeply subordinated nature of the debt instrument, the very weak protection of the noteholders under the documentation, and the volatility of the recovery prospects as a result of this subordination.
The recovery rating on TUI's senior unsecured debt remains unchanged at '3', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default. The issue rating on the unsecured debt is 'B-', in line with the long-term corporate credit rating on TUI. The senior unsecured debt instruments, which rank pari passu, comprise a EUR233 million (originally EUR450 million) senior fixed-rate bond maturing in December 2012, a EUR218 million convertible bond due in 2014, a EUR100 million private placement due in 2014, and a EUR339 million convertible bond maturing in 2016.
We think a default would occur if TUI's cash needs--mainly interest expenses, debt repayment, and some overheads--were not covered by its cash inflows, and if all available liquidity sources were used up. We consider that TUI's future cash inflows would principally comprise dividends and interest payments from subsidiaries. In our opinion, refinancing risk would be the main default trigger.
We moved our simulated default year to 2014 from 2013, given our opinion that the company would have sufficient liquidity to repay its debt maturing over the next 12 months, and would only default the year after, in 2014, which corresponds to the maturity of the convertible notes and the private placement. In our default scenario, this would be accompanied by TUI's limited success in monetizing its assets. Moreover, challenging market conditions in the tourism and travel business for TUI Travel, event risks, and major loss of bookings due to pressure on consumer spending could, in our view, lead to a dramatic reduction in dividends from the group's main investments.
Our stressed valuation of TUI's investments and operations is about EUR2.1 billion at the point of default, taking into account its main investments:
-- TUI's shares in TUI Travel, based on about 56% ownership (assuming 21% of shares currently owned by Nero and Antium will be returned to TUI) and applying a 40% haircut to the current valuation. We assume that TUI would seek to retain the approximately 8% of TUI Travel that TUI can acquire through the SPV Antium Finance Ltd. and the approximately 13% that it can acquire through Nero Finance Ltd. by repayment of the debt raised against these shares;
-- We also assume full value of the GBP200 million convertible bond issued by TUI Travel that TUI receives upon repayment of the Antium Finance-related debt;
-- Some value from the group's hotels, other real estate assets, and cruise shipping, after applying a haircut to the book value of these assets; and
-- TUI's equity stake in Hapag-Lloyd, which will be reduced to 22% on June 30, 2012, with a significant haircut applied to the estimated current value.
After deducting priority liabilities of about EUR300 million--comprising mostly enforcement costs--we calculate a net stressed enterprise value of about EUR1.8 billion. We then deduct about EUR500 million of other debt and prepetition interest, which we assume to be prior ranking. In addition, we assume that TUI would have been able to repay the senior notes due December 2012 and the exchangeable notes due April 2013.
On this basis, we see sufficient value to allow meaningful recovery prospects (50%-70%) for TUI's senior unsecured debtholders and modest recovery (10%-30%) for the subordinated noteholders.
Although cover on unsecured debt is nominally greater than 70%, we do not see any upside for the recovery ratings or issue ratings. This is because the debt is unsecured and sits at a holding company level, and therefore we view recovery prospects as relatively volatile, owing to the reliance on equity values.
Similarly, the recovery prospects on the subordinated notes could be numerically higher than 30%, but the recovery rating of '5' takes into account the contractual subordination to the unsecured debt and the very weak protection under the documentation.
The stable outlook reflects our view that TUI will be able to maintain an 'adequate' liquidity profile over the medium term, despite a potentially more difficult operating environment in 2012 and 2013. It also reflects our expectation that any material acquisition would be conservatively financed.
We could lower the ratings if event risk or unexpected operating shortfalls significantly impaired liquidity. The ratings could also be lowered if a change in TUI's strategy led to a significant releveraging of the company due to mergers and acquisitions activity.
An upgrade is unlikely over the next 12 months, given TUI's holding company status; limited access to operating cash flows; and still high group leverage on a consolidated basis, which we do not see falling below 6x on a sustainable basis.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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