Airport Services Provider Swissport Group S.a.r.l 'B' Rating Affirmed On HNA Acquisition Close; Outlook Stable
- We understand that HNA Group has finalized its acquisition of Luxembourg-based airport services provider Swissport Group S.a.r.l. Swissport has raised Swiss franc (CHF) 1.5 billion equivalent debt, which together with HNA's equity injection, have been used to fund its acquisition, repay existing debt, pay transaction fees, and as additional cash on balance sheet.
- We continue to assess Swissport's business risk profile as fair, reflecting the company's exposure to the cyclical and competitive airline industry, and view its financial risk profile as highly leveraged.
- We are therefore affirming our 'B' long-term corporate credit rating on Swissport and related entities.
- The stable outlook reflects our view that Swissport should be able to maintain its profitability at least at current levels.
LONDON (Standard & Poor's) Feb. 17, 2016--Standard & Poor's Ratings Services today said it has affirmed its 'B' long-term corporate credit rating on Luxembourg-based airport services provider Swissport Group S.a.r.l (Swissport, the new parent company of the Swissport Group) and related entities. The outlook is stable. At the same time, we assigned our 'B' issue rating to the CHF110 million senior secured revolving credit facilities (RCF), the €660 million (CHF714 million equivalent) term loan B, and the €400 million (CHF433 million equivalent) senior secured notes issued by Swissport International Ltd. and Swissport Investment S.A. The recovery rating on these instruments is '3', reflecting that our recovery expectations are in the higher half of the 50%-70% range, in the event of a payment default. In addition, we are assigning our 'CCC+' issue rating to the €290 million (CHF314 million equivalent) senior unsecured notes issued by Swissport Investment S.A., two notches below the corporate credit rating. The recovery on the notes is '6', indicating our expectation of negligible recovery (0%-10%) in the event of a default. Finally, we are withdrawing our rating on the former parent of the group Aguila 3 S.A. at the company's request. Following the refinancing, the existing CHF350 million and $945 million notes issued by Aguila 3 S.A. were fully repaid on Feb. 16, 2016, and as such we are withdrawing our 'B' issue and '4' recovery ratings. The affirmation follows Swissport's announcement that HNA Group has finalized its acquisition of the airport services provider from private equity firm PAI Partners. Swissport has raised CHF1.5 billion equivalent debt, which together with HNA's equity injection, have been used to fund its acquisition, repay existing debt, pay transaction fees, and as additional cash on balance sheet. HNA has contributed CHF1.6 billion of equity into the group and, as a result, the mandatory convertible preference shares--that we treated as debt in our adjusted credit metrics--no longer exist. We are withdrawing our rating on the former parent of the group Aguila 3 S.A. The rating reflects our continuing view of the company's fair business risk profile and its highly leveraged financial risk profile. There has been some deterioration in Swissport's EBITDA margin over the last year, in part driven by increased pricing pressures on the renewal of contracts, adverse foreign exchange movements, and losses at certain stations. In addition, the company's increased exposure to the higher-margin de-icing activities introduced volatility to its operations. That said, we believe that, under HNA Group's ownership, Swissport could benefit from further higher-margin opportunities in Asia and Africa, which could support a recovery of margins. However, in our view, significant improvement in profitability is unlikely over the short term. This is because potential new contract wins require significant capital outlays and involve start-up costs, particularly in regions where the company does not have an established network. Nevertheless, we expect Swissport should be able to maintain profitability at least at its current levels, including adjusted EBITDA of 10%-11% over the next 12 months. Our business risk assessment continues to reflect Swissport's position as a leading independent provider of ground handling services and its well-diversified customer base, in what we consider to be a highly fragmented market. We continue to view Swissport's financial risk profile as highly leveraged. We forecast that cash flow generation will contribute to some leverage reduction over the medium term. That said, under our base-case scenario, we forecast that the company will maintain Standard & Poor's-adjusted debt to EBITDA of about 5.7x-6.2x and EBITDA interest coverage of more than 2.5x, over 2016 and 2017, which is commensurate with our 'B' rating. We believe that the acquirer, a legal entity of the HNA Group, is effectively acting as a financial sponsor by following an aggressive financial strategy using debt to maximize shareholder returns. Accordingly, the financial risk profiles we assign to companies controlled by financial sponsors ordinarily reflect our presumption of high leverage. Our 'FS-6' assessment constrains our financial risk profile assessment at highly leveraged, unless there is evidence of a material shift in financial policy and commitment to lower leverage materially. Our base case assumes:
- Revenue growth in the low to mid-single-digits in 2016 following a reduction in revenues in 2015. The strengthening of the Swiss franc accounted for a significant part of the deterioration in 2015, with the remaining decline a direct result of disposed or discontinued businesses.
- We expect Swissport's reported EBITDA margin to improve to around 7%-8% in 2016 (from nearer to 6% in 2015), driven by direct cost savings and the divestment of loss-making stations.
- Small bolt-on acquisitions of up to CHF15 million in 2016.
Based on these assumptions, we arrive at the following credit measures for the years to Dec. 31, 2016 and 2017:
- Adjusted funds from operations (FFO) to debt of about 9%-11%.
- Adjusted debt to EBITDA of about 5.7x-6.2x.
- EBITDA interest coverage of about 2.5x.
The stable outlook reflects our view that Swissport should be able to maintain its profitability at least at current levels. We believe that an improvement in profitability is possible over the medium term if Swissport fully realizes synergies from its recent acquisitions and successfully executes its growth ambitions in Asia and Africa. Furthermore, we believe that following the recent transaction, Swissport's annual interest bill will be reduced, which will contribute to free cash flow generation and some leverage reduction over the medium term. We expect Swissport to maintain debt to EBITDA of around or below 6x and EBITDA interest cost of at least 2x over the next two years. We also anticipate that the company will maintain adequate liquidity. We could lower the rating on Swissport if its revenues and profitability decline as a result of a loss of multi-year contracts, or if we observe a significant cash outflow due to higher-than-expected integration and start-up costs for new businesses. This could lead the company's cash flow generation and credit metrics to fall below levels that we consider commensurate with a 'B' rating. We could also lower the rating if Swissport's interest coverage ratio falls to less than 2x, or its liquidity weakens significantly. We could raise the rating on Swissport if the company reduces its debt through improved operating performance, leading to stronger credit metrics with adjusted debt to EBITDA decreasing to less than 5x, on a sustainable basis. However, given the current high levels of absolute debt, we think this scenario is unlikely to materialize over the next year. RELATED CRITERIA AND RESEARCH
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Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
| Primary Credit Analyst: | Rachel J Gerrish, CA, London (44) 20-7176-6680; rachel.gerrish@standardandpoors.com |
| Secondary Contact: | Alexandra Balod, London (44) 20-7176-3891; alexandra.balod@standardandpoors.com |
| Recovery Analyst: | Thibaud Lagache, Paris +33 1 44 20 67 89; thibaud.lagache@standardandpoors.com |
| Additional Contact: | Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com |
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