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Rating Action:

Moody's changes outlook on TUI AG's Ba3 rating to positive; confirms ratings

18 Aug 2015

London, 18 August 2015 -- Moody's Investors Service has today confirmed the Ba3 corporate family rating (CFR), the Ba3-PD probability of default rating (PDR) and the Ba3 senior unsecured rating of TUI AG (TUI), Europe's largest leisure, travel and tourism company. Concurrently, Moody's has changed the outlook to positive. Today's action concludes the rating review implemented by Moody's on 16 June 2015.

"Our decision to change the outlook to positive reflects the reduction in TUI's adjusted debt, following revisions to the way we capitalize operating leases. It also considers ongoing improvements to TUI's underlying operating performance, despite heightened security concerns in Tunisia and volatility in Greece," says Sven Reinke, a Moody's Vice President-Senior Credit Officer and lead analyst for TUI.

Moody's updated approach on standard adjustments for operating leases is explained in the cross-sector rating methodology "Financial Statement Adjustments in the Analysis of Non-Financial Corporations", published on 15 June 2015.

https://www.moodys.com/research/Moodys-updates-its-global-methodology-for-financial-statement-adjustments--PR_327853

RATINGS RATIONALE

Today's outlook change and confirmation reflect significant improvements to TUI's key credit metrics following the changes to Moody's approach for standard adjustments for operating leases. For example, TUI's lease adjusted gross debt/EBITDA ratio was 4.3x and its retained cash flow/net debt ratio was 18.4% at the end of fiscal year 2013-14 (to September), when considering the revised methodology. This compares to an adjusted gross debt/EBITDA ratio of 5.7x and a retained cash flow/net debt ratio of 12.9% for the same period prior to the changes to the standard adjustments.

TUI's operating performance continued to improve during the first nine months of the current fiscal year, as indicated by a materially lower seasonal loss of EUR78 million in terms of underlying group EBITA compared with a loss of EUR178 million in the previous year's period as well as lower net interest expenses of EUR142 million -- a reduction of EUR40 million. TUI's improving performance was largely due to its better performing RIU hotels and cruise ship operations.

However, reported EBITA during the first nine months was largely unchanged at negative EUR239 million compared with negative EUR242 million during the first nine months of fiscal 2013-14 due to materially higher one-off items. So far, the security concerns in Tunisia and the economic crisis in Greece have had only a minor impact on TUI's overall financial results. In addition, Moody's positively notes TUI's guidance for a 12.5%-15% improvement of the group's underlying EBITA for the current fiscal year and its target of at least a 10% CARG of the underlying EBITA for the next three years.

TUI's all-share merger with its majority-owned subsidiary, TUI Travel, is progressing well and TUI has recently increased its forecasted synergies that will be delivered from the combination of the two businesses. In addition, all previous convertible bonds at TUI AG and TUI Travel PLC were almost fully converted into equity, thereby reducing the group's debt level.

Moody's concluded its rating review with a change of the outlook to positive rather than a rating upgrade, as it believes that TUI faces challenges in the months ahead mainly due to political and macro-economic uncertainties in some of its key destinations, such as Greece and Turkey, that could result in weaker demand for these holiday destinations.

In addition, TUI currently reports a high level of one-off expenses -- partially related to the merger with TUI Travel PLC - that Moody's does not necessarily adjust for. Accordingly, Moody's expects that TUI's financial profile will only further improve in the next fiscal year 2015-16 when more merger synergies will be realised and one-off expenses reduce.

Moody's believes that TUI's liquidity position is solid with a three-year syndicated credit facility of EUR1,535 million maturing in June 2018 that was undrawn at the end of Q3 fiscal 2014-15 in June 2015 as well as EUR1,576 million of cash and cash equivalents. Moody's believes that TUI's liquidity is sufficiently flexible to meet the high seasonal cash swings -- in particular in the first quarter of the fiscal year -- as well as the fairly low debt maturities over the next few years.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook reflects Moody's view that the key adjusted leverage metric will improve in the next fiscal year, mainly driven by synergies as a result of the merger, less restructuring and merger related one-off expenses and further improving underlying performance that will only partially be offset by rising capex and dividend payments. The financial profile of TUI could further benefit if funds from an eventual divestment of the stake in Hapag-Lloyd AG are applied to debt reduction.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider upgrading TUI's rating if the company were to generate merger synergies as forecasted and continue to improve its operating performance without materially increasing indebtedness. In addition, the rating would come under positive pressure should TUI continue to adapt a prudent financial policy framework and demonstrate the resilience of its business model to external shocks. Quantitatively, positive pressure could arise if the group's gross adjusted leverage were to fall towards 4.5x and the retained cash flow (RCF)/net debt metric to increase towards 15% throughout the seasonal swings of the year, with the group retaining a solid liquidity profile to address the high seasonal cash swings.

The rating could be lowered if leverage were to increase above 5.5x and RCF/net debt to fall towards 10.0% over the next 12-18 months, 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 December 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

TUI AG, headquartered in Hanover, Germany, is Europe's largest integrated tourism group, and currently retains a stake of around 14% in Hapag-Lloyd AG following the merger with CSAV, which is a leading provider of container shipping services. In fiscal year 2013-14 (to September), TUI reported revenues and underlying EBITA of EUR18.5 billion and EUR870 million, respectively.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Sven Reinke
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on TUI AG's Ba3 rating to positive; confirms ratings
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