S&P: Airline Caterer gategroup Ratings Affirmed On Cancelled IPO; Off Watch Positive; Outlook Stable

S&P Global Ratings today affirmed its 'B-' long-term issuer credit rating on Switzerland-based airline solutions provider gategroup Holding AG and removed the rating from CreditWatch with positive implications where it was placed on March 8, 2018 (see "Airline Caterer gategroup Holding Rating Placed On Watch Positive On Announced IPO For About 65% Of Its Share Capital," published on RatingsDirect). The outlook is stable.

Our removal of the rating from CreditWatch positive reflects the recent announcement from the company, and its parent HNA Group, that it will not pursue its intended IPO of about 65% of its share capital due to unfavorable market conditions.

We continue to consider gategroup as part of the HNA Group and our issuer credit rating on gategroup is therefore materially affected by our view of HNA Group's weaker overall credit standing. Looking at gategroup on a stand-alone basis, we do not have any current liquidity concerns, nor do we believe that the company is dependent on favorable business, financial, or economic conditions to meet its financial commitments. The company's 2017 financial results to Dec. 31, 2017 were fully in line with our expectations, and we believe that its market position in airline catering remains strong. The SACP for gategroup therefore remains 'bb'.

Our base-case scenario for gategroup includes:In 2018 and 2019, we assume sales growth of between 3.5% and 6.0% per year due to the full-year effect of the Servair acquisition and the opening of operations in South Korea. More than 2.0% of the growth is linked to our weighted-average GDP growth forecast for all the countries in which the company generates revenue. Our unadjusted EBITDA margin to improve to about 6.4% in 2018 (from 6.0% in 2017) on the back of direct cost savings, synergies from acquisitions, and a stricter contract renewal process. Capital expenditure (capex) of about Swiss franc (CHF) 180 million in 2018 and CHF125 million in 2019.We include AirFranceKLM's put option--currently valued at about CHF260 million--to sell its remaining 50% stake in Servair to gategroup as a debt-like obligation in our base-case scenario. No material acquisitions. Based on these assumptions, we arrive at the following credit measures for 2018 and 2019:Adjusted FFO to debt of about 18%-20%, which is in line with 2017 (19%). We note that excluding the put option, which we view as debt-like, the ratios are nearer 23%-25%.Adjusted debt to EBITDA of about 3.5x-3.8x (or about 3.1x in 2018 and below 3.0x in 2019 excluding the put option).The stable outlook reflects our view that gategroup has much stronger credit metrics, on a stand-alone basis, than its parent. Based on gategroup's current debt levels, the company has significant headroom for operational underperformance before the 'B-' issuer credit rating would be affected. Furthermore, we currently do not assume negative interventions from HNA Group that would undermine gategroup's ability to pay its debt obligations in the next 12 months.

We could lower our rating on gategroup if HNA Group adversely intervened or if gategroup were drawn into any potential insolvency or distressed restructuring as a result of HNA Group's weak credit position.

We could raise the rating on gategroup if HNA Group materially reduced its financial leverage and stabilized its liquidity position such that we revised HNA Group's GCP upward and considered it commensurate with a 'B' or higher rating. Furthermore, we could upgrade gategroup if we reassess our view of its group status within HNA.
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