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Rating Action:

Moody's affirms TUI's Ba2 rating, changes the outlook to negative from stable

02 Apr 2019

Frankfurt am Main, April 02, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Ba2 corporate family rating (CFR), the Ba2-PD probability of default rating (PDR) and the Ba2 senior unsecured rating of the world's leading tourism company TUI AG (TUI). Concurrently, TUI's outlook has been changed to negative from stable.

"The outlook change to negative reflects the downward trend of TUI's operating performance in 2019 due to structural challenges in the tour operator business, increasing macroeconomic challenges and the negative cost impact of the recently announced grounding of the Boeing 737 MAX 8", says Vitali Morgovski, a Moody's Assistant Vice President-Analyst and lead analyst for TUI.

RATINGS RATIONALE

The grounding of the Boeing 737 MAX 8 has prompted the company to revise its guidance for the second time this year. Instead of a stable underlying EBITA the company now expects a decline of 17% to 26% in fiscal 2019, depending on whether Boeing 737 MAX 8 will resume flying by mid-July or the issues will persist for the end of season. In addition to the one-off costs related to the 737 MAX grounding, Moody's has lowered the expectations of TUI's operating performance in the coming 12-18 months given the market challenges. Moody's now expects TUI's leverage ratio to increase towards the upper end of the previous required 3.5x -- 4.5x range for the Ba2 rating, which is in contrast to the previous expectation of a flat operating performance trend in fiscal 2019.

In contrast to the previous guidance of broadly stable underlying EBITA in fiscal 2019, TUI now expects EUR200 million negative impact in connection with the Boeing 737 MAX 8 grounding. The impact is attributable to the leasing of additional aircraft in order to secure customer holidays, higher fuel costs related to the extension of expiring leases for older aircraft that were supposed to be replaced by 737 MAX 8 as well as other disruption costs. Having around 150 aircraft in its fleet TUI has grounded 15 737 MAX 8 while another eight 737 MAX 8 are scheduled for delivery by the end of May 2019. TUI's measures are covering the time until mid-July. However, should 737 MAX 8 not return to service and TUI will have to extend the extraordinary measures until September 2019, an additional negative impact of up to EUR 100 million is to be expected.

Moody's now expects a material deterioration in TUI's credit metrics due to the abovementioned effects while there is a considerable uncertainty on their full impact and duration. Higher lease expenses, that TUI estimates at around 55% of total extraordinary costs, will lead to higher debt adjustments, for which Moody's applies a multiplication factor of 5x. At the same time, there are material costs other than leases that will reduce Moody's adjusted EBITDA. As a result, Moody's expects TUI's gross leverage (Moody's adjusted) to increase towards the upper end of the required 3.5x -- 4.5x range for the Ba2 rating by the end of fiscal 2019.

Moreover, there is a considerable uncertainty whether the ratio can be reduced in the following fiscal year as it depends on 737 MAX 8 resuming flying, which is outside of TUI's control, and also improving earnings in times when the tourism market is facing a number of challenges ranging from an intensified competition in the tour operator segment, continued cost pressure, capacity shift from Western to Eastern Mediterranean, which can negatively affect TUI's highly profitable hotel business segment and the uncertainty with regard to the final outcome of Brexit negotiations and their impact on consumer confidence and behavior. In addition to one-off costs related to 737 MAX 8 grounding, Moody's has lowered its expectation of TUI's operating performance in the coming 12-18 months given these market challenges.

Furthermore, Moody's expects TUI's free cash flow to be distinctly negative this year, especially if the company keeps its capex program unchanged, which appears likely at the moment. TUI's liquidity position consisting of EUR2.5 billion cash in September 2018 (EUR0.9 billion in December 2018) as well as EUR1.5 billion revolving credit facility (RCF) available for cash drawings (EUR0.2 billion utilized in December 2018) may decline by EUR700 -- 900 million during fiscal 2019. While this would still be sufficient to meet TUI's high seasonal working capital needs during the first fiscal quarter that Moody's estimate to be around EUR1.5 billion, the overall liquidity will become weaker compared to the previous few years when TUI's liquidity benefitted from the EUR2 billion asset disposals in fiscals 2016 and 2017. Moody's expects TUI to remain in compliance with financial covenants under its RCF throughout the next 12-18 months.

However, Moody's adjusted free cash flow next year can potentially benefit from lower capex spending after the reinvestment of EUR2 billion asset disposal proceeds are concluded and also from lower dividends that according to TUI's dividend policy are linked to the development of the underlying EBITA, both in positive and negative way. Moreover, IFRS16 adoption for fiscal years starting in October 2019 onwards can potentially strengthen Moody's adjusted credit metrics by reducing adjustments currently applied for operating leases. More public disclosures on this topic during 2019 would allow Moody's to fine-tune its expectations and to include the impact more implicitly into the rating.

Moody's views positively TUI's adaption of its business model away from a classic tour operator to an integrated provider of holiday experiences during the recent few years. Since the merger with TUI Travel in 2014, the combined group has increasingly invested in new hotels, cruise ships and more recently in the development of destination services business and has diversified away from the concentration on the classical tour operator business. This led to a steadily increasing share of underlying EBITA coming from the more predictable Cruises and Hotels businesses, as the profitability share of Markets & Airlines (formerly called Source Markets) has declined to 36% of the group's underlying EBITA in fiscal 2018 from 75% in fiscal 2014.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the uncertainty in regards to the length of the Boeing 737 MAX 8 grounding and TUI's ability to recover its credit metrics to the extend required for the Ba2 rating given the market challenges in the tourism sector and the risk of a no-deal Brexit.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider upgrading TUI's rating if the company were to demonstrate further resilience of its business model to external shocks and to continue the adaption of its business model to structural challenges. Quantitatively, positive pressure could arise if the group's gross leverage ratio (Moody's adjusted) were to fall below 3.5x and the retained cash flow/ net debt (Moody's adjusted) to remain above 25% throughout the seasonal swings of the year. The group is expected to retain a good liquidity profile to address the high seasonal cash swings during the year.

The rating could be under negative pressure should TUI not be able to fully offset any additional external shocks that might occur or shows a lack of ability to offset structural challenges. Quantitatively, the rating could be lowered if the leverage ratio (Moody's adjusted) were to increase above 4.5x and the retained cash flow/ net debt (Moody's adjusted) were to fall below 15%, or if the group's liquidity profile were to deteriorate materially.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

PROFILE

TUI AG, headquartered in Hanover, Germany, is the world's largest integrated tourism group. In the fiscal year to September 2018, the group reported revenues and underlying EBITA of EUR19.5 billion and EUR1.1 billion, respectively. TUI is listed on the Frankfurt and London Stock Exchanges with a current market capitalisation of EUR4.9 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Vitali Morgovski, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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