Spain-Based Independent Accommodations Distributor HNVR Midco Ltd. Assigned #B# Outlook Stable

Stocks and Financial Services Press Releases Tuesday May 16, 2017 17:42
MADRID--16 May--S&P Global Ratings

MADRID (S&P Global Ratings) May 16, 2017--S&P Global Ratings today assigned its 'B' long-term corporate credit rating to Spain-based independent accommodations distributor HNVR Midco Ltd. (Hotelbeds). The outlook is stable.

At the same time, we assigned our 'B' issue rating and '4' recovery rating to the company's amended senior secured debt facilities, comprising a €1,007.6 million term loan B (TLB) and a €247.5 million revolving credit facility (RCF). The '4' recovery rating indicates our expectation of 45% recovery in the event of a payment default.

Our rating on Hotelbeds reflects our assessments of the company's business risk profile as weak and financial risk profile as highly leveraged. Hotelbeds is a global independent business-to-business (B2B) accommodation distributor offering hotel rooms and ancillary products--such as transfers, excursions and tours, meetings and events, visa processing outsourcing, and cruise handling services--to the travel industry. Founded in 2001, the company is based in Palma de Mallorca, Spain.

The recent agreements to acquire Tourico and GTA are strategically positive for business, in our view, including higher scale and scope and further geographic expansion into the U.S. and Asia-Pacific, and should unlock synergies. Nevertheless, we view the integration and execution risks as material, because the company will simultaneously face integrating two similar companies with many overlapping functions and different IT platforms, very shortly after its carve-out from TUI. We also note the carve-out of GTA is part of a complex transaction underway at Kuoni, and many aspects are still to be defined. We do not expect the GTA acquisition to close before the end of 2017.

In our opinion, Hotelbeds' business risk profile is characterized by the high degree of cyclicality and seasonality inherent in the travel industry. Its cyclicality is somewhat less than that of a traditional travel operator, in our view, given its relatively asset-light nature, but its seasonality is very pronounced, as about 55% of EBITDA is generated in its fourth quarter (financial year end is Sept. 30). In addition, the B2B bedbank segment, from which Hotelbeds derives the bulk of its profit, is highly competitive and fragmented. Hotelbeds is the global market leader in the segment but has only about 15% market share (pro forma for TH and GTA). In our view, because the online travel agency and lodging segments continue to consolidate and offline-online migration continues, Hotelbeds could be adversely affected by disintermediation. We also view Hotelbeds as exposed to typical event risks in the travel sector, such as natural disasters, and geopolitical incidents, including terrorism attacks like those seen recently in France, Turkey, and Egypt. These markedly dampened GTA`s performance in 2016. Lastly, although we understand that Hotelbeds has operated within TUI semi-autonomously under a long-standing management team, we lack a track record of Hotelbeds operating fully independently. Consequently, we consider that Hotelbeds faces increased risks as it integrates TH and GTA at the same time.

These constraints are to an extent offset by Hotelbeds' leading market position, with notable scale, especially in its core, expanding bedbank market, which offers some barriers to entry, in our view. Our assessment also takes into account Hotelbeds' broad geographic diversity both in terms of source and destination markets. Its products are present in over 185 countries, and although Europe is its most important source market, we understand Asia-Pacific is emerging as an important growth engine in the near term. Moreover, the GTA acquisition will extend Hotelbeds' reach in Asia-Pacific, given GTA's strong presence in the region. We also view positively the expected strengthened position in the U.S., both as a source and destination market, given TH's local focus. In terms of profitability, we view Hotelbeds' margins as average for the industry.

We assess Hotelbeds' financial risk profile as highly leveraged, considering its relatively high post-transaction debt for this business as well as its private equity ownership, leaving minimum headroom under the current ratings. We view risks of foreign-exchange movements as higher, given that TH's business is predominantly in U.S. dollars, GTA has substantial exposure to various currencies in Asia-Pacific, and all debt is mostly denominated in euros. We are unaware of any material hedges to be put in place and consider currency fluctuations an important risk. We also understand and assume that the equity to be rolled over from EQT and current Kuoni shareholders, as part of the acquisition, will comply with our criteria to beconsidered as pure equity, in line with the original transaction of Hotelbeds from TUI. We will revisit this point once we receive final documentation.

We estimate pro forma adjusted leverage (debt to EBITDA) at about 6.8x as of Sept. 30, 2017, and we anticipate this metric will remain in the highly leveraged category over the next 12-24 months. However, we expect leverage will reduce to about 5.8x in fiscal 2018, mainly owing to our estimate of realized synergies. Still, we note this deleveraging depends on the company's ability to smoothly execute its strategy and contain any integration or unexpected costs arising from the three-way merger transaction. Adjusted EBITDA interest coverage will likely remain above 3.0x over the same period, together with positive free operating cash flow (FOCF) generation, owing to Hotelbeds' business model of negative working capital and relatively low net capital expenditures (capex).

We make note that our financial analysis is based mostly on independent third-party due diligence reports because audited accounts are not yet available for the Hotelbeds-TH-GTA combined entity.

The stable outlook reflects our view that Hotelbeds will post good operating performance, with 5% to 7% total transaction value growth in fiscal 2017, while maintaining adequate liquidity and generating positive FOCF. We expect these growth levels will be sustained in 2018, mostly on account of its pro forma scale, further geographic reach, and synergies to be realized. However, we also expect adjusted debt to EBITDA will remain markedly above 5x over the next 12-18 months.

We could take a negative rating action on Hotelbeds if audited financial statements differ notably from those presented in the due diligence reports, causing our credit metrics to deteriorate substantially vis-a-vis our current base case. We could also lower the ratings if poor operating performance causes adjusted free cash flow to deteriorate significantly. This could occur, for example, if integration costs turn notably higher than anticipated and synergies below expectations, or if revenue trends were to reverse and start declining, leading to potential difficulties on the working capital management front. A pronounced deterioration in liquidity or adjusted operating cash flow to debt falling below 5% could also result in a negative rating action.

An upgrade is unlikely over the next 12 months, given Hotelbeds' limited track record of operating as a stand-alone company, together with the complexity of integrating TH and GTA, and its high debt burden. Over the long term, we would view sustainable positive FOCF, leverage remaining below 5x, and a sustainably more conservative financial policy as supportive of a higher rating.


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