S&P Global Ratings raised its issuer credit rating on KCIBT Holdings L.P. (CIBT) to ‘CCC’ from ‘SD’ (selective default). The outlook is negative.
At the same time, S&P is lowering its issue-level rating on the company’s first-lien debt facilities to ‘CCC’ from ‘CCC+’ and raising its issue-level rating on its second-lien debt to ‘CC’ from ‘D’. S&P has revised its recovery ratings on the company’s first and second-lien debt to ’4′ and ’6′, respectively.
“Our ‘CCC’ rating reflects our expectation that liquidity will continue to deteriorate over the next 12 months, thereby presenting risk of a shortfall or increasing the likelihood that the company will undertake a new distressed restructuring or debt exchange,” S&P said.
To conserve its liquidity the company has taken actions including reductions to its workforce, a focus on near-term working capital collections and payment extensions, and the recent amendment to its credit agreement that allows for a portion of cash interest to be paid-in-kind. Despite these efforts, so long as travel restrictions remain in place, S&P expects CIBT could burn $10 to $15 million per quarter. At this rate, S&P foresees total available liquidity (including $15 million in incremental equity contributed by the company’s financial sponsor in July) declining below $15 million by the second quarter of 2021, presenting a near-term liquidity shortfall absent meaningful improvement in operating conditions.
Demand for CIBT’s visa services will remain under considerable pressure as long as the coronavirus pandemic continues to challenge international business travel.
International travel volumes are likely to remain depressed for a prolonged period, with certain forecasts not expecting global air travel to recover to pre-pandemic levels until 2023 or later. CIBT’s concentration with corporate customers (nearly 80% of its customer base) further exposes it to the more vulnerable segment of business travel which will likely lag in recovery as companies curtail nonessential trip expenses in order to weather the weak economic environment and protect employee safety. Further, the adoption of video-conferencing tools could present longer-term risks of a secular decline in demand for certain corporate travel patterns.
S&P assumes a 65% to 70% revenue decline in 2020, and expect that 2021 could recover to 45% to 55% of 2019 revenue levels, though a majority of that revenue is likely to be earned in the second half of the year, reflecting anticipated easing of cross-border restrictions and individual safety concerns. S&P acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic and its long-term effects on the travel industry, and S&P will revise its forecast as it gains visibility into the pace of recovery. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. S&P is using this assumption in assessing the economic and credit implications associated with the pandemic. As the situation evolves, the rating agency will update its assumptions and estimates accordingly.
Environmental, social, and governance (ESG) factors relevant for this rating action:
— Health and safety
The negative outlook reflects S&P’s expectation for CIBT’s operating results to remain materially stressed as long as the global pandemic restricts international travel and presents travel safety concerns, resulting in free operating cash flow deficits that will erode liquidity over the next 12-18 months.
“Over the next 12 months, we would likely lower our rating if persistent cash flow deficits indicate a potential liquidity shortfall, or we believe a default or debt restructuring could be forthcoming,” S&P said.
“Although unlikely over the next 12 months, we could revise our rating to stable if travel restrictions are lifted and consumer and business confidence improves, supporting growth in visa volumes and positive free positive cash flow generation, thereby stemming near-term liquidity concerns,” the rating agency said.