Swissport : Additional creditors’ protection makes us more comfortable

>The funding of the Aerocare acquisition includes junior capital and additional covenants have been added on the term loans - Swissport provided its 2017 preliminary results and details on the financing of the Aerocare acquisition in a lenders’ presentation that was published on Wednesday. The deal, which closed on 7 March 2018, amounts to € 411m, plus € 26m of commissions. It was funded by 1/ a new € 325m term loan B announced at end-January and in the process of being syndicated, 2/ the partial repayment of the intragroup loan to HNA (€ 52m in February) and 3/ a € 100m investment made by a 3rd party investor at the level of Swissport Global Services Holding (outside the restricted group), which was subsequently on-lent to the credit group in the form of equity. Unused funds (€ 48m) will strengthen the group’s cash position. In order to make lenders more comfortable, we understand that the TLB (and indirectly holders of the 2021 & 2022 notes) will benefit from an additional provision banning restricted payments to HNA if the intragroup loan remains outstanding and the net leverage exceeds 4.5x. Furthermore, Swissport must use future proceeds from the potential repayment of the intragroup loan to repay all term loans on a pro-rata basis, until the net leverage declines to 4.5x.Preliminary 2017 results are broadly in line with our expectations - They came as no surprise, showing favourable trends in the group’s markets. Sales grew by +4.6% to € 2.81bn in 2017e and Ebitda rose +6.6% to € 220m, buoyed by volume growth and the streamlining of the contract portfolio. Our forecasts were € 2.79bn and 223m, respectively. In Q4 alone, sales (€ 692m) and Ebitda (€ 50m) improved by +5.7% and +3.5%, respectively. Q4 margin dipped to 7.3% (-15 bp) given difficulties in the US (earlier contract terminations and higher personnel rotation) and the write-down of receivables owed by Air Berlin.Leverage at end 2017 (pro-forma for the Aerocare deal) was 4.9x at the level of the restricted group and 5.8x at Swissport Group (including € 76m of unrestricted debt, € 53m of legacy bonds and the € 100m investment). Aerocare generated € 168m of revenues and € 38m of Ebitda in 2017 with a margin of 22.6%. Its operating cash flow (Ebitda - capex) reached € 32m.Buy reco. on the 2021 & 2022 exchanged notes (vs. Neutral) - This week, S&P lowered the outlook from Stable to Negative because it includes the new junior funding in its adjusted debt calculation (S&P’s adjusted leverage now reaches 7.0x) and it may downgrade the B- rating if the outstanding loan to HNA (€ 348m) is not repaid in a timely manner (on 7 May 2018). We have a more positive view because the new RP provision will prevent HNA from siphoning Swissport’s liquidity, and the new € 100m junior capital enables not to deteriorate the leverage at the restricted group level. Swissport’s € 265m notes due 2022 (Caa2/CCC, Ytw of 7.5%, z+739 bp) are up c. +1 point this week.We raise our recommendation to Buy on the 2021 & 2022 notes that were exchanged during last summer (vs. Neutral). We are still doubts about the repayment of the HNA loan and the success of the planned IPO (on this front we understand that the IPO prospectus of sister company Gategroup has been validated, and that Gategroup will have 5 independent board members out of 9), but a restricted leverage of 4.9x seems manageable, liquidity has improved, the industry outlook for 2018 is positive and bank debt covenants have been strengthened. We now have a Reduce recommendation (vs. Neutral) on the legacy bonds (€ 37m of 2021 notes and € 16m of 2022 notes) that sit above the restricted group and the € 100m investment (see the organization chart on page 4).