Swissport : The tribulations of a Chinese group in Switzerland

>Credit opinion: Stable // Market recommendation: Neutral - Operating results should further improve in 2018 (we forecast a 4% increase in revenues and EBITDA), driven by a solid market outlook, the ongoing ramp of operations in Saudi Arabia and restructuring actions. However, these developments should be partially offset by FX headwinds, the integration of Aerocare and potential start-up costs in China. We expect that the net leverage will stay above 5.0x (forecast of 5.2x vs. 5.4x in 2017, pro-forma for the Aerocare acquisition) as a result of negative FCF which would lead to tighter covenant headroom at end-2018, unless the loan granted to HNA is repaid. Given the liquidity concerns at HNA, we consider that the redemption of this loan mostly depends on a successful IPO of Swissport which is planned for Q2. Such outcome would definitely ease a refinancing of Swissport bonds. We are cautious about the IPO scenario given current market volatility and potential market concerns about HNA. On the positive side, valuation multiples in the industry (between 7x-9x) still leave some equity cushion in our view, and the recent signing of an additional € 325m Term loan B demonstrates bank support to the company.The spreads of 2021 secured notes (B1/B-, ytw of 5.0%, z+496 bp) and the 2022 unsecured notes (Caa1/CCC, ytw of 8.1%, z+786 bp) is more or less in line with the average of our bond samples (488 bp and 854 bp, respectively). Bond spreads of peer company WFS are tighter (374 bp for the secured notes and 634 bp for the unsecured notes) but this fairly reflects its lower leverage (4.0x vs. 5.4x for Swissport including Aerocare). Upside from current price points would mostly depend on the completion of the IPO plan for which we have a prudent view.Support factors - ? Largest independent provider of ground & cargo handling services with € 2.68bn of revenues (>2x bigger than its main rivals WFS and Menzies) and € 206m and adjusted EBITDA in 2016. Swissport holds 12% of its addressable market. Its global presence and its wide service offering are key positive factors.? Diversified customer base (top 10% customers = 30% of sales) and geographic presence (Europe = 49% of sales, North America 36% and RoW 15%).? Positive outlook for the addressable ground & cargo handling markets in 2018 thanks to favorable end-markets and greater outsourcing.? A successful IPO in the course of this year would increase the independence of Swissport vis-à-vis HNA and ease a debt refinancing.Points to watch - ? Negative FCF expected in 2017e (-€ 74m) and 2018e (-€ 13m) owing to restructuring expenses, high interest payments and working capital needs.? Parent company HNA allegedly faces some liquidity issues and there are question marks around the repayment of the outstanding HNA loan in case the IPO plan fails. € 52m have been repaid to date (out of € 413m including accrued interest).? High net leverage of 5.1x at end-September 2017, whose trajectory will depend on the repayment of the HNA loan.? Pricing pressure in developed markets, requiring more selectivity on contract wins/renewals.