S&P downgrades SAS on debt default risk
Standard & Poor's has downgraded SAS’s issuer credit rating owing to concerns that the airline’s capital structure is “unsustainable”, risking a restructuring of its debt obligations, which the agency views as “tantamount to default”.
The agency has downgraded the Scandinavian airline’s issuer credit rating from B to CCC and maintains it on “credit watch” with negative implications, reflecting a “high probability of a debt restructuring within the next few weeks”.
It warned that any restructuring programme may mean lenders “receive less than originally promised and we would likely consider it distressed in the next few weeks”.
S&P said that while the Star Alliance carrier is taking steps to cope with the collapse in air travel caused by the Covid-19 crisis, it does not believe these are sufficient to “counterbalance the severe slump in revenue”.
For example, it noted that the 5,000 redundancies planned by the Stockholm-based carrier will only materialise in 2021 due to the six-month notice period required.
The agency estimates that SAS's adjusted EBITDA will turn “materially negative” in its 2020 fiscal year, which combined with adjusted debt increasing to more than SEK40 billion ($4.3 billion), points to an “unsustainable” financial leverage ratio.
S&P regards the flag carrier’s liquidity as being “less than adequate”.
“We now expect SAS's liquidity sources will not cover uses over the 12 months started 1 May, 2020. Furthermore, we believe the airline is dependent on further state support to meet its financial commitments,” it said.
However, the agency noted that SAS had entered talks with the governments of Sweden and Denmark and other stakeholders to negotiate a recapitalisation plan.
At the CCC standalone credit profile level, the rating does not factor in any notches for government support.
As part of its credit watch resolution, it plans to reassess SAS's status as a government-related entity, as well as the likelihood of government support. It plans to resolve the credit watch status once it has more details regarding the ongoing recapitalisation efforts and on whether the airline will take steps to restructure its debt.
The agency further believes that the Covid-19 pandemic will result in an up to 50% decline in air passenger traffic in 2020, which, combined with "gloomy" recovery prospects and SAS's very high fixed costs, is exacerbating liquidity risk and pressuring the capital structure of the airline.
Last month, SAS said it was in “active, intensive and constructive discussions” with the company’s major shareholders and selected stakeholders on a recapitalisation plan to ensure the future of SAS.
Having secured support from the Danish and Swedish governments to provide a 90% guarantee for a SEK3.3 billion revolving credit facility, the airline said it was seeking similar support from the Norwegian government.
At present almost 15% of shares in SAS are owned by Sweden and 14% by Denmark, with the rest divided among banks, individuals, foundations, funds and pension and insurance companies.
Asked whether the recapitalisation plan would result in greater state ownership in the carrier, SAS chief executive officer Rickard Gustafson has said he would struggle to give a clear answer as the flag carrier was still in active discussions with the governments of Denmark and Sweden.