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Rating Action:

Moody's downgrades Dufry's rating to Ba3 from Ba2; placed on review for downgrade

25 Mar 2020

London, 25 March 2020 -- Moody's Investors Service (Moody's) has today downgraded Dufry AG's (Dufry or the company) Corporate Family Rating (CFR) to Ba3 from Ba2 and its Probability of Default Rating (PDR) to Ba3-PD from Ba2-PD. Concurrently, Moody's has downgraded to Ba3 from Ba2 the backed senior unsecured ratings of Dufry One B.V.. The outlook on all ratings has been changed to ratings under review.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline sector has been one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Today's action reflects the direct linkage of Dufry's revenues to airline passenger volumes and the breadth and severity of the shock.

Less than two weeks ago the company published its 2019 results, which were in line with Moody's expectations and absent the clear negative implications of Covid-19 would have seen the company well positioned in the Ba2 rating category. Dufry grew its top line, reported adjusted operating profit of CHF767.8 million just behind the 2018 level, and reduced net debt by CHF184.2 million over the year. The rating agency calculates the company's year end Moody's-adjusted gross leverage (including the IFRS 16 impact) was 3.8x.

The rating action reflects the significant pace of negative developments and dramatically reducing international air traveller volumes. As such, Moody's now believes that the impact on the company's profits and cash flow this year will be significant, and that depending on the severity and duration of the pandemic, the company's liquidity could be materially diminished in the absence of additional funding or actions to preserve cash which were not previously contemplated.

Moody's base case assumptions are that the coronavirus pandemic will lead to a period of severe cuts in passenger traffic over at least the next three months with partial or full flight cancellations and aircraft groundings, with all regions affected globally. The base case assumes there is a gradual recovery in passenger volumes starting in the third quarter. However there are high risks of more challenging downside scenarios.

The rating agency's base case analysis assumes around a 50% reduction in Dufry's revenues in the second quarter and an 23% fall for the full year, but the rating agency has also modelling significantly deeper downside cases including airlines in most regions having full fleet grounding during the course of Q2 and a more extended period of severely depressed volumes.

Under the rating agency's base case Dufry's net debt at the end of 2020 will be approximately CHF300 million higher than a year earlier and the company's Moody's-adjusted gross leverage will have increased to more than 5.5x. The modeling does not factor in any potential support that governments around the globe may provide to companies affected by the crisis, including for example paying part of the salaries of employees that would otherwise have been laid off. In addition, although the rating agency has modeled reductions in variable rents it has not factored in any temporary amendments to minimum annual guaranteed rents which Dufry may be able to agree with landlords. Moody's highlights the inherent uncertainties and variables involved in modeling profitability and cash flows in times of great uncertainty.

LIQUIDITY

Dufry started 2020 with total available liquidity of more than CHF1.2 billion, comprising cash of CHF553 million and access to around CHF700 million undrawn funds in its EUR1.3 billion revolving credit facility. In normal circumstances Moody's would have considered this to represent a good liquidity position, given known seasonality and a history of positive free cash flow generation over the course of the year.

However, in Moody's base case modelling Dufry's liquidity will be weak during the course of 2020, and in particular during the second and third quarters when headroom against the RCF limit could be less than CHF100 million. In its cash flow modeling the rating agency assumes that the proposed dividend is not paid and that the company retains full access to its RCF despite an anticipated covenant breach. Moody's also recognises that the company may be able to access additional credit facilities to boost liquidity. However, the material fall in Dufry's share price since the start of the crisis is negative in the rating agency's view as it may limit its access to capital.

The review process will be focusing on (i) the current market situation with a review of current passenger traffic conditions and pre-booking trends for the next few weeks, (ii) the liquidity measures taken by the company and their impact on the company's balance sheet, (iii) other measures being taken by the company to alleviate balance sheet and credit metrics stress.

WHAT COULD CHANGE THE RATING UP/DOWN

The ratings are unlikely to be upgraded in the short term. Positive rating pressure would not arise until the coronavirus outbreak is brought under control, travel restrictions are lifted, and passenger volumes return to more normal levels. At that stage Moody's would evaluate the balance sheet and liquidity strength of the company and positive rating pressure would require evidence that the company is capable of substantially recovering its financial metrics and restoring liquidity headroom within a 1-2 year time horizon.

Moody's could downgrade Dufry if:

- there are expectations of deeper and longer declines in airport passenger volumes including a material extension into Q3 2020 as a result of the coronavirus outbreak, particularly if not matched by additional sources of liquidity;

- wider liquidity concerns increase, for instance due to cost inflexibility;

- there are clear expectations that the company will not be able to maintain financial metrics compatible with a Ba3 rating following the coronavirus outbreak, in particular if (a) gross adjusted leverage is expected to remain sustainably well above 5.0x; or (b) interest cover is expected to be sustainably below 1.5x.

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, and as detailed above the impact of the crisis on the company's credit quality has been the key driver of the downgrade and review. The rating agency considers Dufry's governance practices have been and remain appropriate and typical of a publicly listed company.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Basel, Switzerland, Dufry is the leading global travel retailer, covering 65 countries across over 400 locations, operating over 2,400 shops in airports (90% of sales),as well cruise liners, seaports, railway stations and downtown tourist areas. The company reported sales and operating profit of CHF8.8 billion and CHF433 million respectively in 2019.

Dufry is listed on the SIX Swiss Exchange with a free float of approximately 60% and a market capitalisation of around CHF1.5 billion currently, compared to around CHF5 billion this time last year and in the period immediately before the escalation of the Coronavirus crisis.

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.

David Beadle
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
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

No Related Data.
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