Moody’s puts TAP’s debt rating at the fifth level of “junk”

  • ECO News
  • 20 November 2019

This is the second financial rating agency to assess the airline, which is on the market to place 300 million euros in bonds. The valuation is worse than that of S&P.

Moody’s assesses TAP’s debt with a B2 rating, the fifth level of speculative investment, with a stable outlook. This is the second financial rating agency to assess the airline which is on the market to place 300 million euros in bonds with private investors. The valuation is worse than that of Standard and Poor’s.

The assessment relates to seven factors, starting with the strategic location of Lisbon airport, where TAP has a ‘robust’ market share. The agency also points to TAP’s ‘competitive cost structure’, which is lower than in other European airlines due in particular to low personnel costs. The market share on the routes between Europe and Brazil, the transformation strategy and the hedging of fuel price coverage also help.

Finally, Moody’s highlights the company’s increased focus on operational profitability since privatisation and both the support of the Portuguese Government and the importance of TAP for the Portuguese economy and tourism. In fact, the company’s real rating would be one level lower, but the strong probability of state intervention in case of need led Moody’s assigning level B2.

TAP’s rating is limited by the small size of the operator and concentration of activity, as well as the volatility of performance and “still low” profitability, according to the agency. The report is released the day after TAP announced losses of EUR 111 million between January and September.

The leverage of the capital structure, with a debt to EBITDA ratio of seven times, combined with the “weak” credit profile of the parent company also weighed on the valuation. Finally, Moody’s identified the long macroeconomic cycle as a “high risk” for the demand for air travel, which could put pressure on yields over the maturity of the debt.

“The stable outlook reflects our view that TAP SA and TAP SGPS will be able to translate the reduction in CASK and fuel costs into stronger profitability and a deleveraging path at the end of 2019,” says Moody’s, adding that it anticipates “the maintenance of an adequate liquidity profile”.

TAP, therefore, has two evaluations from international rating agencies. The airline is in a roadshow with institutional investors and aims to issue 300 million euros in bonds. The bonds have a maturity of five years and the interest rate is not yet known.

Standard & Poor’s was the first agency to assess TAP’s operation and also classified it as a speculative investment, but at BB- level, i.e. at the third level of “junk”. The outlook is also stable.