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Rating Action:

Moody's downgrades Carlson Travel's CFR to B3 from B2; outlook changed to negative

12 Mar 2020

Approximately $1.04 billion of rated debt impacted

New York, March 12, 2020 -- Moody's Investors Service, ("Moody's") downgraded Carlson Travel, Inc's ("Carlson Travel") Corporate Family Rating (CFR) to B3 from B2 and Probability of Default Rating (PDR) to B3-PD from B2-PD. Concurrently, Moody's affirmed the B2 ratings of the company's senior secured fixed and floating rate notes and downgraded its senior unsecured notes to Caa2 from Caa1. The outlook was changed to negative from stable.

The downgrade to B3 and negative outlook reflects Moody's expectation for severe disruptions within the global corporate travel sector in the first half of 2020 due to the Coronavirus (COVID-19) outbreak that will greatly impact Carlson Travel's operating results and weaken its liquidity. Global airline and hotel bookings have dropped sharply and could remain tepid for the remainder of 2020. Given that COVID-19 has yet to be contained, there are downside risks that demand for corporate travel will remain weak for the entirety of 2020 and the company's earnings could decline in the double-digit percentages. Nevertheless, Moody's believes that Carlson Travel has the ability to adjust its cost structure in response to weaker demand and has already put in place a plan to reduce annual operating expenses by $200 million and lower its growth capital spending.

Moody's took the following rating action on Carlson Travel, Inc.:

Downgrades:

..Issuer: Carlson Travel, Inc.

.Corporate Family Rating, Downgraded to B3 from B2

.Probability of Default Rating, Downgraded to B3-PD from B2-PD

..Issuer: Carlson Travel, Inc.

. $250 million senior notes due 2024, downgraded to Caa2 (LGD5) from Caa1(LGD6)

Affirmation:

..Issuer: Carlson Travel, Inc.

.$415 million senior secured guaranteed notes due 2023, affirmed at B2 (LGD3)

EUR 330 million senior secured guaranteed notes due 2023, affirmed at B2 (LGD3)

Outlook Actions:

..Issuer: Carlson Travel, Inc

.Outlook, Changed to Negative from Stable

RATINGS RATIONALE

Carlson Travel's B3 CFR reflects operating headwinds in the corporate travel industry, including significant revenue and earnings contractions due to the disruption caused by the COVID-19 outbreak and increasing uncertainties around the global economic outlook. The rating considers Carlson Travel's high debt-to-EBITDA leverage (Moody's adjusted and expensing all capitalized software costs) in the mid-8.0x range as of December 31, 2019 and Moody's expectation that leverage could exceed 10.0x in 2020. Moody's expects growth rates for global business travel to remain under pressure, reflecting a weakening macro environment and continued pressure on client yield/pricing. Cash flows are expected to remain constrained in 2020 due to an anticipated earnings decline and a high level of restructuring costs. Finally, the rating also reflects the risk associated with the renewal of the remainder of the US Department of Defense contracts, which are expected to go through a bidding process in late 2020.

Nonetheless, Carlson Travel's rating is supported by its leading position within the global travel management industry, providing services to a large group of corporate clients situated in well-diversified end markets and across nearly 145 countries and territories worldwide, historically high client retention rates at 96%, and modest customer concentration. Given its management of over $23 billion in annual spend and when the travel industry rebounds, the company has the ability to drive significant volume and provide competitive rates to its corporate customers not offered to the public. Business travel is driven fundamentally by GDP and is highly cyclical; however, the company has a good track record of managing its costs over the last downturn. A large portion of the company's total operating expenses consists of staff costs (63% of total costs as of December 31, 2019), which can be managed in a lower demand environment.

The negative outlook reflects Moody's expectation for weakening operating performance and liquidity stemming from the COVID-19, which is now classified as a global pandemic. The negative outlook also reflects uncertainty surrounding the duration of travel disruption and Carlson's ability to quickly adjust cost and maintain adequate liquidity.

Moody's expects Carlson Travel to have adequate liquidity over the next 12-15 months. Sources of liquidity consist of cash reserves of around $134 million at December 31, 2019, along with availability of the majority of its $150 million super senior revolving credit facility, less ordinary course letters of credit and bank guarantees. However, free cash flow is expected to be negative. The revolver contains a minimum EBITDA covenant of $122.4 million which must be maintained at all times. Moody's expects the company will remain in compliance with its financial covenant.

The ratings could be downgraded if the company's revenue and earnings decline more severely than expected leading to debt-to-EBITDA (Moody's adjusted and expensing all capitalized software costs) sustained above 9.0x, free cash flow remains negative, or if there is a material deterioration in liquidity.

The ratings could be upgraded if Carlson Travel sustains positive organic growth, decreases its debt-to-EBITDA (Moody's adjusted and expensing all capitalized software costs) sustainably below 6.5x, free cash flow improves meaningfully and adequate liquidity is maintained.

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.

Formed in 1997, Carlson Travel is a leading global business travel management company (TMC), serving corporations of all sizes as well as government institutions around the world. In 2019 CWT reported net revenues of $1.5 billion. Carlson Travel operates in nearly 145 countries and territories worldwide, with around 16,000 employees in its wholly owned operations. The company provides the following services: (i) Corporate Traveler Services, providing both online and full-service offline travel bookings for corporate and government clients; (ii) Meetings & Events Services, assisting clients to create and manage meetings and events on a cost effective basis; and (iii) Roomit hotel distribution services, providing a comprehensive hotel inventory and booking solution for clients and their business travelers, as well as distribution platform for over 800,000 hotels.

REGULATORY DISCLOSURES

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.

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.

Oleg Markin
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Karen Nickerson
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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