London, 30 November 2012 -- Moody's Investors Service has today changed the outlook on the ratings of gategroup Holding AG ("gategroup") to stable from positive.
The stabilisation of the outlook reflects Moody's view that it is unlikely to upgrade gategroup's ratings in the near term. This in turn reflects the weaker than expected operating profitability of the company during the first nine months of 2012 combined with a weaker macroeconomic outlook for 2013-14 which is expected to affect global air traffic and passenger airlines.
At 30 September 2012, gategroup reported an 11% year-on-year growth in revenue at c. CHF2.2 billion due to a combination of volume increase (both organic and acquisitions), price pass-throughs to customers and foreign exchange movements. Revenue growth, however, has not fully translated into profit increase due to a drop in profitability in its Airline Solutions Europe division, higher restructuring charges and financing costs . This was driven by an adverse mix of service change, such as the decline of traditional short haul in favour of low-fare carrier model, start-up costs of new businesses as well as some reinvestment into growth. As a result normalised EBITDA (before restructuring costs) declined to c. CHF142 million from c. CHF156 million during the same period in the prior year with corresponding decline in normalised EBITDA margin to 6.3% from 7.7%. Additionally, operating profit was affected by higher restructuring charges (not included in normalised EBITDA) of c. CHF13 million (compared to c. CHF4 million during the same period last year).
To offset the weakness in its European division the company launched a number of initiatives to achieve CHF30 million of cost savings during the course of 2013 related to labour driven savings, back office streamlining and portfolio optimisation. Moody's does not expect normalised EBITDA margin improvement in 2012. The profitability in 2013 is expected to stay vulnerable, subject to the success of cost savings measures and further restructuring measures which may be required as well as further cost pressures from the airlines. Positively, Moody's expects gategroup to benefit from the recent acquisitions and new business gains.
The concerns about airline industry development should be seen in the context of more conservative macroeconomic forecast recently undertaken by Moody's. Moreover, Moody's remains concerned about the customer concentration of gategroup given the consolidation trend prevalent in the airline industry, as well as its geographical diversification, which, although improved in Asia Pacific through the acquisition of Skygourmet, remains focused on Europe and the US (together, 79% of YTD September 2012 revenue).
The company's liquidity remains good, including c. CHF241 million cash on balance sheet and fully undrawn CHF120 million (EUR100 million) revolving credit facility.
What Could Change the Rating - Up
Any positive pressure on the ratings would require Gross Adjusted Debt / EBITDA to fall towards 3.5x, free cash flow to stay positive, and (EBITDA - Capex) / Interest expense ratio to be sustained well above 2.0x. Additionally, Moody's will consider the extent to which the company has increased its geographical and customer diversification.
What Could Change the Rating - Down
Negative rating pressure could develop if Gross Adjusted Debt/EBITDA rises towards 4.5x on a sustained basis, free cash flow turns negative or (EBITDA -- Capex) / Interest expense ratio falls towards 1.5x on a sustained basis. A material deterioration in the liquidity position of the company or a sizeable debt funded acquisition would also be negative for the company's rating.
The principal methodology used in rating gategroup Holding AG and gategroup Finance (Luxembourg) S.A. was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Zurich, gategroup Holding AG is the leading independent airline caterer and hospitality and logistic services provider in the world.
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