Influential credit agency Moody’s has lowered the corporate family rating (CFR) and probability of default rating (PDR) for travel technology giant Travelport.
Moody’s says its outlook for the business remains “negative” after downgrading the CFR and PDR to CAA1 from B3, defined as from “subject to high credit risk” to “poor standing and are subject to very high credit risk” [full explanation of terms].
“The senior secured, senior unsecured and the subordinated instrument ratings have also been lowered to B1 from Ba3, to Caa2 from Caa1, and to Caa3 from Caa2, respectively,” Moody’s says in a note to investors issued yesterday.
Moody’s new position comes after what it calls “further weakening of operating results” at Travelport published two weeks ago, but also the larger issue of the Travelport’s debt to its holding company, essentially private equity powerhouse Blackstone.
The so-called Payment In Kind (PIK) loan is to the tune of around $700 million and is due at the end of March 2012.
Travelport, which will not comment on the PIK, nor Blackstone have yet to announce a strategy for how the debt issue will be resolved, prompting the latest concerns at Moody’s, one of the three large rating agencies in the world alongside Standard & Poor’s and Fitch.
The investor note says:
“Moody’s believes that the pending maturity of the PIK notes at Travelport Holdings Ltd in March 2012 poses a degree of risk for the financial profile of Travelport LLC if they are not entirely refinanced at the holding company level.”
Although the clock is ticking ahead of March 2012, Travelport will not comment other than to say it is “business-as-usual”.
An official adds:
“Our credit rating goes up and down all the time, similar to other companies. Rating changes have no impact on our business operations, financial condition and contracts.”
Anyone that has ever held a mortgage knows that buying debt is an everyday practice.
Despite all the drama surrounding the AA debate with Sabre and Travelport, the GDS business is a solid business and the purchase of that debt is something that will appeal to a wide range of financial players.
The GDS business has adjusted to a wide range of external factors over the past 30 years and despite the pressure of channel shift that is intensifying, it has consistently produced solid returns in line with expectations for its investors (whether the airlines that originally owned the businesses, the public or private equity companies).
If a ride on a roller coaster is “business as usual”, then yes, it is business as usual for Travelport. But it is not their debt rating that is causing the roller coaster. It is just adding an interesting dimension to the ride.
@Chicke – Disagree totally.
The GDS’s corporate inertia make it about as nimble and sustainable as an iceberg in the Mediterranean – moving slow and disappearing slowly but surely.
If GDS model is so solid, why is Sabre investing in models like SynXis and Soft Hotel? Answer: Diversifying their portfolio. The issues with American Airlines, and other direct connects soon to follow, also indicate rough seas ahead for the GDS model in general. Add Google, and other eventual innovators to the mix, and you have the makings of a “Perfect Storm”.
The bond rating companies are not idiots and definitely have their finger on the pulse – no matter what one may think about recent US AAA to AA downgrade.
They may get the re-finance that you alluded to, but they are definitely going to pay through the nose to get it (>10%), only exacerbating their problems and doing the quintessential “kicking the can down the road”.
Note to broker: Short Travelport, hard!!!
Oh and John, on the diversification front, the GDSs have all had diversification strategies that extended into providing IT for suppliers and other businesses. The move into hotel for Sabre is not new.
Diversification is wise. I am just an advocate of opening their eyes beyond air as a mode of transportation that feeds all of their other engines – including hotel booking, cruise booking and car booking.
Hi Chicke
I wasn’t insinuating that it was ONLY a new strategy, although Soft Hotel is an example of a VERY new acquisition. http://www.tnooz.com/tag/hotels/page/2/
However, I am suggesting that it is an appropriate strategy in order to remain relevant moving forward.
After all, horse and buggies and turntables are only relevant for novelty rides through Central Park and DJs these days. Every product has a life span, it’s my opinion that we’re witnessing the end of GDS’s in real-time.
Always enjoy the provocative and healthy debate you encourage though. Cheers.
John, my two entries were posted out of sequence as my browser crashed before the next one got posted.
Anyway, healthy debate is what I live for! It is no fun to write about the things that I am passionate about without understanding how people really think and react.
Thanks for taking the time to comment.
John, no need to apologize for healthy debate.
I see why you would comment on the inertia. Most multi-billion dollar companies do not have the luxury of turning on a dime, as we entrepreneurs can do.
What I am saying is that despite challenges both present and past, the GDSs are resilient and they adjust costs and models and even their investment in innovation accordingly to both their situation and to the demands of their owners.
However my comments were about the downgrade and what it means to the industry. I would no more move away from the US because of our credit downgrade than Travelport’s users should away from them as a provider of distribution technology and services.
Investors always make their own decisions and those with a low risk tolerance would indeed sell. The smarter ones, might buy, knowing that there will indeed be a white knight (or a black one in sheep’s clothing) that will indeed buy the debt. It is a riskier play for sure.
But my comments should not be taken to mean that I do not believe that change is needed with the GDS in order for them to have a sustainable, growing business long term.
Having been involved with private equity acquisition teams for both Galileo and Worldspan, I can tell you that the bidders on both transactions were not under the impression that the growth curve was going up. They knew about channel shift. This is not new news.
Here is my take. If the GDS remain air centric (with the airline disintermediation and channel shift being analogous to global warming that cannot be stopped), they will slowly but surely melt away like we are seeing with the polar ice cap.
The three GDS companies all make the bulk of their revenues from the air traveler. That means that whether they are selling IT services to an airline, or selling a hotel room, a car rental, a cruise cabin or an airline ticket through a brick and mortar agency or an OTA, it is generally to someone whose mode of transportation is air.
Here in the US, there are 1 billion day trips annually and 1 billion overnight trips. Of the overnight trips, just 15% are by air and 85% are by car. The mix is about 50/50 on the day trips.
Our industry has created a multi-billion dollar business on the 15% that fly. For over 3 decades, the GDS has played an integral role in powering the industry.
But I believe it is time to begin creating the multi-trillion dollar industry to service the other 85% and it will take the entire industry working together to make that happen. To this end, we created the Project 85 Think Tank and companies like Avis and Wyndham, AOL and Mapquest are a part of beginning to map out (pardon the pun) what that would look like.
The GDS companies, including Travelport, can choose to play. Or not.
If they continue to choose the status quo, I agree, the melting has begun.
Or as one of the panelists from next week’s GBTA Direct Connect Hot Seat panel told me yesterday:
“The fish is now officially in the fryer.” Temperatures are rising.
Chicke – all points taken on board. I envy your grasp of, and experience in, the industry. As you know, I’ve been following many of your online conversations for a while.
Clever and subtle segway / plug to Project 85 too, by the way. Still interested in connecting, with a means to support the initiative. Will follow up wit you on LinkedIn.
Which brings me to another point.
At the risk of turning this into a “love fest”, kudos has to go to the community that Tnooz, and it’s leading cast of characters, @Kevin, @Dennis, @Gene et al, have nurtured into a forum for civil discourse in travel and technology.
The dialogue on other popular tech sites, not mentioning any names… ahem, Techcrunch, inevitably attracts the lowest common denominator in people and ending up in a conversational race to the bottom. With their founder and chief “do as I say, not as I do” protagonist leading the race to the finish line.
I know I’ve said it a few times already, but good job, again, Tnooz. You deserve all the success you enjoy.
Suppose this is where I should say, in my best drunken voice, “I love you man!”
I am reminded that they are not the first rating agency to issue a concern. S&P issued a concern in February 2011. Just 3 months after S&P had been glowing about Travelport in November of 2010. At the time S&P did not alter its rating despite voicing the concern.
I have to disagree with Chicke. I believe that the level of external influences on the marketplace are significant. The GDS model as a whole is being challenged. In my personal and somewhat biased view this is the right thing to do. Travelport is the only purist of the group. It only operates in the GDS space. It has some airline IT but this is minor in comparison to Sabre and Amadeus. It does hold a 48% interest in Orbitz. However judging by the recent unfavorable analysis by Nomura of the whole OTA market might not be a positive for the company. 30 years of history will not save the company. Radical reformation not business as usual must be the order of the day for them.
In comparison to the public information from its peer – Amadeus, Travelport does not compare favourably on direct GDS business comparisons in the usual metrics of size, profitability etc. Marketshare and yields have been in decline for some time based on my analysis of publicly available information.
Could Travelport turn itself around? A tough question. One that now stares the management teams in Atlanta and Langley hard in the face.
There are no easy answers here.
Cheers
Ah Timothy, we don’t disagree about the level of external influence. It isn’t just the GDs model that is being questioned, it is the whole model from end to end. Where is the value provided? That is the real question.
As to running the company with the right level of staff, investment, etc. That is business 101. I do miss the days when all the GDS’ were public and we could compare them head to head.
Since we got our start with the behemoths, we are allowed to poke at them, as well as to remember the role they played in getting this industry to where it is.
Now, alas, it is time to move on. I just wish there were less chaos left in the wake of that move.