Swissport Group Downgraded To 'B-' On Owner's Weaker Group Credit Profile; Outlook Stable

Editor -
  • We have revised the group credit profile of the diversified, but highly
    leveraged, Chinese conglomerate HNA Group, the strategic owner of
    Swissport, to 'b' from 'b+'.
  • The revision reflects significant debt maturities and tightening
    liquidity at HNA Group. While HNA Group continues to access the debt
    market, its cost of funding has materially increased from a year ago.
  • We are consequently lowering our long-term corporate credit rating on
  • Swissport to 'B-' from 'B', because we think HNA Group will be less
    willing to support Swissport in the event of financial stress.
  • The stable outlook reflects our view that Swissport will likely at least
    maintain its profitability and achieve adjusted EBITDA interest coverage
    of about 2.0x over the next 12 months.

FRANKFURT (S&P Global Ratings) Dec. 5, 2017--S&P Global Ratings today lowered its long-term corporate credit rating on Luxembourg-based airport services provider Swissport Group S.a.r.l (Swissport) and the group's related entities to 'B-' from 'B'. The outlook is stable.

At the same time, we lowered our issue rating on the senior secured €460
million term loan B and €364 million senior secured notes issued by Swissport
Financing S.a.r.l. to 'B-' from 'B'. The recovery rating on the debt remains
'3', reflecting our expectations of recovery in the 50%-70% range (rounded
estimate: 55%) in the event of default.

We also lowered our issue rating on the group's remaining senior unsecured notes to 'CCC' from 'CCC+'. The recovery rating on this debt remains '6', indicating our expectation of negligible recovery (0%-10%) in the event of a default.

We lowered our issue rating on the Swiss franc (CHF) 110 million senior secured revolving credit facility (RCF) issued by Swissport International Ltd. to 'B-' from 'B'. The recovery rating on this instrument remains unchanged at '3', reflecting our recovery expectations in the 50%-70% range (rounded estimate: 55%) in the event of a payment default.

The downgrade follows our downward revision of HNA Group's group credit
profile (GCP) to 'b' from 'b+', reflecting the group's tightening liquidity
and sizable debt maturities. HNA Group is the controlling owner of Swissport,
and we consider Swissport to be a moderately strategic subsidiary of the HNA
Group because the company provides backward integration to its airline
businesses through its ground handling and cargo operations. Our ratings on
Swissport are therefore affected by our view of HNA Group's aggressive
acquisition policy, tolerance for high leverage, and contracting liquidity
burdened by significant debt maturities over the next several years. While HNA
Group continues to access the capital markets, its funding costs appear to be
meaningfully higher than a year ago. We are closely monitoring HNA Group's
access to, and cost of, external sources of funding to determine whether a
further reassessment of its GCP is necessary.

Our view of a group member's overall creditworthiness incorporates the
likelihood of it receiving financial support from the group (or being subject
to negative intervention). We may include a positive notch of adjustment in
our rating on group subsidiary from its stand-alone credit profile (SACP), if
we think the parent is willing and has the ability to provide financial
support to the subsidiary in case of financial stress. This was previously our
view of Swissport, which we rated one notch above its SACP. However, with the
recent deterioration in HNA Group's credit profile, we believe the group will
be less willing to support Swissport during financial stress. We therefore now
rate Swissport in line with its SACP and no longer incorporate a notch of
uplift reflecting potential group support.

Our SACP on Swissport is unchanged at 'b-', which takes into consideration the
company's highly leveraged financial profile and the lack of well-defined
parameters for its proposed acquisitions, such as the recently announced
acquisition of Australia-based ground handler Aerocare, combined with the
risks that the company's credit measures may deteriorate beyond our forecasts.
Furthermore, according to our base case, the company will continue generating
negative free cash flows in 2017 and 2018. Management has proposed to finance
future acquisitions with equity or with a combination of equity and debt, and
we believe that about €400 million of cash equity, which Swissport currently
lends to an affiliate company of HNA Group outside mainland China for an 8%
interest coupon, is earmarked for acquisitions.

HNA Group injected €718 million of pure cash equity into Swissport in April
2017, to mitigate a technical breach of nonfinancial covenants. In August
2017, the term loan B subject to these covenants was refinanced and Swissport
used €200 million to repay the loan (see "Swissport Group 'B' Rating Affirmed,
Off Watch Negative On Completed Refinancing And Exchange Offer; Outlook Stable,
" published on Aug. 15, 2017, on RatingsDirect). In August 2017, Swissport's
board approved to lend up to €400 million to a related party until February
2018, with up to a 90-day maturity. These loans support our view that HNA
Group could divert assets from Swissport or burden it with liabilities in the
event of financial stress.

On a stand-alone basis, we view Swissport's capital structure as highly
leveraged, underpinned by our forecast of S&P Global Ratings-adjusted debt to
EBITDA of about 6.0x over the next 12 months. Swissport's cash generation was
negative in the first nine months of 2017 (about €88 million), due to working
capital needs and extraordinary costs. Because of its high interest expense
(albeit reducing after the most recent capital structure transactions),
working capital needs, and capital expenditures (capex), we forecast that
Swissport will continue to generate negative free cash flow in the next 12
months.

Our business risk assessment continues to reflect Swissport's position as a
leading independent provider of ground handling services and its
well-diversified customer base. We view favorably Swissport's international
footprint in the ground handling market with more than 800 customers at more
than 230 airports around the globe. However, we consider the €70 billion-€90
billion global ground handling market as highly fragmented. Traditionally,
ground handling services have been provided by airports or airlines
themselves, but the opening up of the market has resulted in the outsourcing
of up to 50% of ground handling services globally to third parties such as
Swissport, according to the International Air Transport Association.

The stable outlook reflects our view that Swissport will likely maintain or
improve its profitability, especially when it fully realizes synergies from
its acquisitions and successfully executes its growth strategy in Asia and the
Middle East.

We furthermore anticipate a gradual improvement of credit measures in the next
12 months, including adjusted EBITDA interest coverage of about 2.0x and debt
to EBITDA below 6.0x. We also anticipate that the company will maintain
adequate liquidity.

We could lower our rating if Swissport's free operating cash flow (FOCF)
remained negative for an extended period of time and if its liquidity
deteriorated materially indicating a risk of a shortfall. This could be the
result of significantly weaker operating performance, increased interest
expense due to debt-funded acquisitions, or tightening of its RCF covenant
headroom, pointing to a likelihood of a covenant breach.

We could raise our rating on Swissport if we revised upward the GCP on HNA
Group to 'b+' from 'b'. Furthermore, we could upgrade Swissport if its
adjusted debt to EBITDA improved sustainably to below 5.0x and if its FOCF
generation turned positive. We could also upgrade the company if we gained
better visibility on its financial policy, including the impact of its future
acquisition strategy on its credit measures.