Moody's downgrades TUI

Moody's Investors Service said it downgraded the corporate family rating of TUI AG to B1 from Ba3, the long-term senior unsecured rating to B1 from Ba3 and the subordinated debt rating to B3 from B2 following an assessment of the company's strategic plan announced on Dec. 15.

This concludes the review for possible downgrade begun on Aug. 11, and the outlook is stable.

The downgrade primarily reflects the agency's view that the expected medium-term improvements in TUI's credit metrics due to the strategic plan will not be sufficient to support a Ba3 rating given the company's strategy to pursue a growth strategy in its two core businesses by adding more capacity in hotels, aircraft and ships.

Moody's said that while over the past few years, the disposal of non-core assets contributed to the company's ability to repay debt and finance its capital expenditure program, the disposal program has now been completed and, going forward, the group will have to rely on its internally generated cash flow to finance this growth, while at the same time continuing the debt reduction program announced on Dec. 15.

The B1 corporate family rating is supported by the company's leading market position in European tourism and the diversification provided by Hapag-Lloyd, TUI's container shipping arm.

The rating also factors in the tourism division's highly seasonal nature and low margin characteristics, the growing competition TUI's vertically integrated model faces on the internet and the margin hit TUI's shipping division suffered in 2006 due to the integration costs of CP Ships acquisition, high bunker costs and inland expenses combined with lower-than-expected freight rates, which the agency said is expected to result in a loss for the full year 2006.

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