MARCH 20TH, 2017
Fitch Ratings Affirms Ryanair at 'BBB+'; Outlook Stable
Fitch Ratings-New York/London-17 March 2017: Fitch Ratings has affirmed Ryanair Holdings plc’s (RYA) Long-Term Issuer Default Ratings (IDR) and Ryanair DAC’s senior unsecured rating at ‘BBB+’. The Outlook on the IDR is Stable.
The unsecured rating covers EUR2.45 billion of debt (pro forma for EUR750 million bond issued in February 2017), and is aligned with RYA’s IDR despite potential subordination to RYA’s secured debt of about EUR2.3 billion. Factors supporting the alignment of the unsecured ratings with the IDR include the company’s strong credit profile, a strong liquidity position, the value of the enterprise relative to the outstanding debt and estimated unencumbered asset to unsecured debt ratio of greater than 2×.
KEY RATING DRIVERS
Business Model Mitigates Industry Risks
RYA’s conservative and simplified business model tempers the impact of gross financial leverage and operating leverage that are characteristic of the airline industry. RYA’s leading cost position, liquidity, high margins and significant cash generation give it the ability to withstand the shocks that periodically hit the airline industry, as well as fending off competitive threats. RYA’s low fleet age and fleet commonality also support the ratings.
Solid Recent Operating Performance
RYA’s performance in the financial year to end-March 2016 (FY16), where revenue rose 16% and margins increased by almost four points, were ahead of Fitch’s conservative forecasts of 10.8% revenue growth and 160bp improvement in its EBITDA margin. RYA’s free cash flow (FCF) before equity returns in FY16 declined to EUR629 million from EUR901 million in FY15 due to higher capex (EUR1,218 million vs. EUR789 million). Results for the nine months ended December 31, 2016 have been more modest as a result of several headwinds, including the result of the Brexit vote. Nonetheless, revenue grew 2% and EBIT rose 6%, which Fitch considers to be better than most competitors in the EMEA airline sector.
RYA generated about 28% of its revenue in sterling in FY16, compared with about 21% of sterling costs excluding fuel. Any decline in international UK traffic as a result of the Brexit vote could adversely affect Ryanair’’s profits. We note the limited visibility on the Brexit outcome and its impact on air travel. The depreciation of sterling post the Brexit vote also highlights the currency exposure risk, although our projections do not factor in a material negative foreign-exchange impact.
High Capex and Equity Returns
Fitch expects capex will remain elevated for the next five years as new aircraft deliveries continue at high levels. Fitch expects RYA to maintain positive FCF throughout this high capex period. RYA has returned substantial cash to shareholders over the past six years, which Fitch expects to continue, assuming no material disruptions to RYA’s business. In November 2016, Ryanair announced a EUR550 million share buyback, taking the total buybacks for FY17 to EUR1,018 million.
High Hedging Position
Fuel and currency volatility is a key issue in the airline sector. RYA continues to address this volatility to a greater extent than its peers, with fuel hedged 95% for January-March 2017 and 87% for FY18. Capex is fully hedged for the Boeing 737-800 programme. Its hedging policy provides cost certainty, but RYA faces a risk that peers with fewer or no hedges will be able to use a fuel price windfall to lower fares. This risk is partly offset by a strong US dollar.
Steady Gross Leverage
RYA’s financial metrics are generally strong for the rating, except gross leverage, which is slightly weak despite a substantial improvement over the past two years. This was offset by net leverage metrics driven by the company’s large cash position. Key credit metrics improved in FY16 due to higher profits and debt amortisation. Leverage (both gross adjusted debt to EBITDAR and funds from operations (FFO)-adjusted gross leverage) was about 2.5x-2.7x at FYE16 compared with 3.5-3.7x at FYE15. FFO fixed-charge coverage rose to 10.0x in FY16 from 7.9x in FY15.
Ryanair is the lowest-cost carrier in the European market and has enjoyed the highest profitability. Cash generation is very strong with cash flow from operations (CFO) averaging above 20% of revenue, which more than offsets the new fleet additions and provides cash for regular return to shareholders. Ryanair maintains a net-debt position of close to zero.
Fitch’s key assumptions within the rating case for Ryanair
- Average ticket price and yield contract in FY17 and FY18 and stabilise in FY19 including the impact from sterling depreciation against the euro as a result of the Brexit vote.
- No significant impact on overall passenger volumes as a result of the Brexit vote.
- Some benefits from lower fuel prices will be offset by lower yields. Other costs increase steadily, particularly airport fees on usage of more primary airports.
- Capex will stay at an elevated level for several years per Ryanair’s delivery schedule.
- Substantial shareholder cash deployment will continue over the next few years. We anticipate that Ryanair will slow or eliminate distributions in the event of an economic downturn or disruption to the airline industry.
- Positive FCF is possible throughout the aircraft delivery period if there are no material shocks to the European aviation sector.
- Net leverage metrics remain stable.
Developments That May, Individually or Collectively, Lead to Positive Rating Action:
The IDR rating has limited upside potential because of the inherent risks in the airline industry and the company’s shareholder distribution policies.
Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- Adverse changes in RYA’s liquidity strategy, unless cash is used to reduce debt, or in other financial and treasury policies;
- EBITDAR margins consistently below 19%;
- FFO fixed-charge coverage consistently in the 4.5-5.0x range or lower;
- FFO net adjusted leverage consistently above 1.0x;
- Revisions to the company’s M&A strategy.
Industry Leading Liquidity: Ryanair had EUR3.2 billion of unrestricted cash at end-3Q17 (EUR4.3 billion at end-FY16), of which EUR2.5 billion (EUR3.1 billion at end-FY16) was held in accounts with maturity over three months but less than one year. Operating liquidity has averaged greater than 70% of annual revenues over the past four years. Fitch expects operating liquidity to decline, but to remain exceptionally strong at close to 60% over the coming years. This underpins Ryanair’s investment-grade rating. This level of cash enables Ryanair to adequately deal with industry shocks as well as assisting in financing, capital expenditure and operational negotiations with suppliers. Ryanair had a net debt position of EUR588 million at end-3Q17 (EUR299 million net cash at FYE16) and is forecast to retain a low net debt or net cash position over the next few years.