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Rating Action:

Moody's confirms Travelex at B2; stable outlook

16 Sep 2015

London, 16 September 2015 -- Moody's Investors Service has today confirmed the B2 corporate family rating (CFR) of TP Financing 3 Limited ("Travelex" or "the company"). Concurrently, Moody's has also confirmed at B2-PD the probability of default rating (PDR) of Travelex, the Ba2 rating of the GBP90 million senior secured bank facility as well as the B2 rating of the GBP350 million senior secured notes due 2018 of Travelex Financing plc. All ratings have a stable outlook.

"Our decision to confirm Travelex's rating reflects the reduction in adjusted debt, following revisions to the way Moody's capitalize operating leases. However this benefit has been offset by weaker operating performance and limited cash flow generation over recent periods" says Guillaume Leglise, a Moody's analyst for Travelex.

These actions conclude the review for upgrade initiated on 16 June 2015 upon the adoption of Moody's updated approach for standard adjustments for operating leases, which is explained in the cross-sector rating methodology "Financial Statement Adjustments in the Analysis of Non-Financial Corporations" published on June 15, 2015.

https://www.moodys.com/research/--PR_327853.

RATINGS RATIONALE

Today's rating action is driven by a combination of factors: (1) the reduction in Moody's adjusted leverage following the changes made to Moody's approach on standard adjustments for operating leases, (2) the company's solid and growing market positions in the global foreign currency services, (3) the weakening earnings growth and declining operating margins in the first 6 months of the current fiscal year, and (4) the continued weak free cash flow generation expected in the next 12-18 months.

Moody's positively notes the improvement in Travelex's key credit metrics following the changes for standard adjustments for operating leases. As such, when considering the revised methodology, Travelex's lease adjusted gross debt/EBITDA ratio was 4.1x at the end of fiscal year 2014, a level considered strong for the B2 rating category. This compares to an adjusted gross debt/EBITDA ratio of 5.5x for the same period prior to the changes to the standard adjustments.

Nevertheless, Moody's concluded its rating review with a confirmation of the current rating rather than a rating upgrade, as it believes that Travelex faces challenges in the months ahead mainly due to adverse foreign currency movements and macro-economic uncertainties in Brazil that could result in weaker demand from or to this travel destination.

Travelex's operating performance during the first 6 months of the current fiscal year has weakened on the back of flattening top line growth and adverse foreign currency movements. Moody's notes that while the underlying business continued to grow, the strengthening of the British pound against major international currencies halted the company's earnings growth trend seen in the last couple of years.

In addition, Travelex's core group EBITDA for the six months ended 30 June 2015 decreased by 13% (8% at constant exchange rates) compared to 2014, mainly reflecting the annualisation impact of new rental terms at Heathrow airport and the weakness in the Brazilian real, which severely impacted outbound sales volumes in Brazil. The EBITDA contribution from Brazil was down 50% during the same period, reflecting the weak real compounded by a high inflationary environment and relatively high fixed cost base. Moody's expects Brazil to continue to weigh negatively on the group's profitability in the next 12 months.

Travelex's profitability was also impacted by increased operating expenses linked to investments in digital and business development. Moody's positively views the company's recent initiatives in the digital segment notably through the development of its own digital solutions. Although paper-based payment remains the leading consumer payment type globally, the strong growth of digital payments poses some business risks over the long-run and forces Travelex to invest into R&D and staffing in this domain. Moody's believes that those efforts will take time to materialise and will constrain profitability and free cash flow generation in the next 12-18 months.

Nevertheless, Moody's recognises Travelex 's strong brand recognition, business profile and position as the leading global retail foreign exchange provider, which is supported by a geographically diverse network of points of sale.

Travelex's liquidity profile is satisfactory but subject to sizeable seasonal swings, reflecting holiday patterns. Moreover, the company is likely to remain free cash flow negative for the next 18 months, on the back of modest probability recovery expected and continued investments in capex. Travelex's liquidity profile will be dependent on the availability under its GBP90 million Super Senior Revolving Credit Facility (RCF), which was drawn for up to GPB20 million at as 30 June 2015, and the "usable cash" held which as of 2Q 2015 stood at GBP60.7 million. Moody's also notes that around GBP30 million are continuously "utilised" but are undrawn under the RCF for bank guarantees, a standard practice in this industry notably to issue letters of credit guaranteeing rents at airports.

RATING OUTLOOK

Travelex's stable rating outlook is based on the assumption that the positive trends experienced in international travel flow over the past few years will persist and counterbalance any risks arising from new payment methods that substitute cash. Moody's ratings also incorporate only a modest improvement in margins, as adverse currency effects seen in certain markets where the company operates and the continued investments in digital will constrain margin improvements in the next 12 to 18 months. In addition, the outlook assumes that the company will maintain an adequate liquidity and no significant change in financial policy.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider upgrading Travelex's rating if the company (1) improves its underlying profitability and is able to reduce its lease adjusted gross debt/EBITDA ratio (as adjusted by Moody's) sustainably below 4.5x, (2) continues to grow and diversify its revenues across geographies and products, and (3) increases sustainably its free cash flow generation.

Conversely, the rating could be lowered if gross leverage (as adjusted by Moody's) were to increase above 5.5x, or if the company'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 this methodology.

Domiciled in Jersey, TP Financing 3 Limited, is the 100% holder of Travelex, the world's leading retail foreign currency exchange specialist, with a wide network of stores (more than 1,500) and ATMs (more than 1,400) concentrated in some of the world's busiest international airports and tourist locations in 29 countries. The company also provides wholesale foreign exchange currencies to central banks, financial institutions and travel agents and has partnerships with supermarkets, high street banks, travel agencies, hotels and casinos as a provider of outsourced foreign currency services. At year-end 2014, Travelex reported revenues of GBP693.3 million, up 8.4% from GBP639.6 million in FY2013 and EBITDA of GBP79.7 million, an increase of 79% compared with GBP44.5 million in FY2013 (before exceptional items, as per statutory accounts).

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.

Guillaume Leglise
Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
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 confirms Travelex at B2; stable outlook
No Related Data.
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