Rating Action: Moody's downgrades Swissport to C upon announced restructuring plans
Global Credit Research - 03 Sep 2020
London, 03 September 2020 -- Moody's Investors Service, ("Moody's") has today downgraded Swissport Group S.a r.l.'s ("the company" or "Swissport") corporate family rating (CFR) to C from Caa2 and probability of default rating to Ca-PD from Caa2-PD. Concurrently, Moody's has downgraded to C from Caa1 the instrument rating on the senior secured term loan B (TLB), senior secured notes (SSN) and senior secured delayed draw term loan facility, and downgraded to C from Caa3 the rating on the senior unsecured notes, all issued by Swissport Financing S.a r.l.. Moody's has also downgraded to C from Caa1 the rating on the senior secured revolving credit facility (RCF) at Swissport International AG level.
In addition, the agency also downgraded to C from Ca the instrument rating on the senior secured notes and on the senior unsecured notes (together "old notes") issued by Swissport Investments S.A. A full list of affected ratings and entities can be found at the end of this press release. The outlook on all ratings remains negative.
The action reflects the anticipated debt restructuring, which will result in a significant haircut to the existing debt, which the rating agency will treat as a default. On the other hand, Moody's expects that the restructuring will provide Swissport with necessary liquidity and will help to achieve a sustainable capital structure to continue the operations. The airline industry volumes will remain deeply constrained this year and next due to the pandemic.
Today's rating action follows the announcement by the company on 31 August of an agreement between its lenders representing more than 75% of the company's senior secured debt and the company's owner, HNA, on a comprehensive debt restructuring. Swissport announced that there will be E500 million new money facilities post-restructuring and that vast majority of the existing debt will be converted to equity or extinguished, which Moody's will treat as a default. The restructuring is subject to the completion of customary conditions and regulatory and other approvals. The company is targeting completion of the restructuring by the end of 2020.
The proposed restructuring follows a period of significantly depressed cash flows which resulted from the global coronavirus pandemic. Swissport was initially impacted by the coronavirus outbreak in February and early March 2020 with restrictions on flights to and from China, Asia Pacific and other regions. As the outbreak spread Swissport's revenue from ground handling operations reduced by 90% year-on-year in April and May. The volumes subsequently started to increase and reached approximately one third of pre-crisis levels in August. However, Moody's expects flight activity to remain severely depressed, with domestic flights recovering earlier and a slower return for international and long-haul flights. Swissport has a global presence and Moody's estimates its mix of domestic and international flights to largely replicate the airline industry average in the countries in which Swissport operates.
Approximately 80% of Swissport's revenue is linked to the number of flights, which although is somewhat less volatile than passenger traffic, has been also significantly affected. Around 20% of Swissport's business is cargo handling, which is less vulnerable to a complete shutdown scenario compared to passenger traffic, but in Moody's view will also be depressed due to lower economic activity and supply chain disruption.
The International Air Transport Association (IATA) currently forecasts that 2020 global passenger numbers will be 61% down year-on-year, with 2021 volumes around 35% below 2019, and only recovering to 2019 levels by 2024. Moody's base case also assumes around 20% lower cargo handling revenues in 2020 which will gradually recover to pre-crisis level by 2022. Given high levels of uncertainty of the trajectory of the pandemic there are a wide range of possible outcomes and Moody's credit assessment considers deeper downside scenarios incorporating the risks of a slower recovery. In particular Moody's considers that 2021 is likely to remain a severely depressed year for the industry, with continued travel restrictions, health screening and social distancing, consumer concerns over travel, a weak economic environment and threats of further coronavirus outbreaks. This is likely to be partially mitigated by better preparedness by governments and healthcare systems, international coordination, pent-up consumer demand and the economic importance of resuming air travel. The timing and profile of a recovery beyond 2021 also remains highly uncertain.
Moody's acknowledges that Swissport managed to significantly reduce its total operating cost and so far was able to preserve its cash liquidity. This was thanks to pro-active reduction of personnel costs with staff layoffs, unpaid leave and enrolling in government support programmes as well as tight working capital management and capital expenditure cuts.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects Moody's expectation that a financial restructuring is highly likely.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the rating is unlikely in the short term but could arise if a sustainable capital structure is put in place. Downward rating pressure could arise if Moody's expectations of recovery rates deteriorate.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
Moody's would like to draw attention to certain governance considerations related to Swissport. The company is currently controlled by HNA, which had a track record of pursuing an aggressive financial policy. Following the proposed restructuring Swissport will be owned by its lenders - a group of UK- and US-based funds.
Swissport's liquidity is challenged by the decline in free cash flow generation. The company had more than E200 million cash as of 18 August 2020, after drawing its revolving credit facility (RCF) and Delayed Draw Facility. More positively, Swissport obtained a E300 million super senior interim facility to cover its cash needs through the restructuring process. In addition, the company received around $170 million of payroll support in the US.
The C ratings for all the rated debt instruments reflect the significant expected losses to the lenders following the proposed restructuring in which the majority of the existing debt will be converted to equity or written off.
LIST OF AFFECTED RATINGS:
..Issuer: Swissport Financing S.a r.l.
....BACKED Senior Secured Bank Credit Facility, Downgraded to C from Caa1
....BACKED Senior Secured Regular Bond/Debenture, Downgraded to C from Caa1
....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to C from Caa3
....Outlook, Remains Negative
..Issuer: Swissport Group S.a r.l.
.... LT Corporate Family Rating, Downgraded to C from Caa2
.... Probability of Default Rating, Downgraded to Ca-PD from Caa2-PD
....Outlook, Remains Negative
..Issuer: Swissport International AG
....BACKED Senior Secured Bank Credit Facility, Downgraded to C from Caa1
....Senior Secured Bank Credit Facility, Downgraded to C from Caa1
....Outlook, Remains Negative
..Issuer: Swissport Investments S.A.
....BACKED Senior Secured Regular Bond/Debenture, Downgraded to C from Ca
....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to C from Ca
....Outlook, Remains Negative
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered near Zurich Airport, Swissport is the world's largest independent ground handling services company, based on revenue and the number of airport locations. In 2019, Swissport serviced flights at 300 airports in 50 countries. The Ground Services segment accounts for roughly 80% of Swissport's group revenue, with cargo handling contributing the remainder. In 2019 Swissport generated revenues and management-adjusted EBITDA of E3.1 billion and E413 million, respectively. The company is owned by the Chinese investment group HNA Group Co., Ltd.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Egor Nikishin, CFA Analyst Corporate Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Richard Etheridge Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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