Sweden-Based Airline Operator SAS AB Upgraded To #B+# On Improving Financial Outlook Stable

Stocks and Financial Services Press Releases Monday November 13, 2017 17:40
FRANKFURT--13 Nov--S&P Global Ratings
FRANKFURT (S&P Global Ratings) Nov. 13, 2017--S&P Global Ratings today raised its long-term corporate credit rating on Sweden-based airline operator SAS AB to 'B+' from 'B'. The outlook is stable.
The upgrade follows a period of improving credit metrics for SAS and reflects our expectation that the company will be able to sustain its 'B+' rating-commensurate financial risk profile.

SAS has improved its ratio of S&P Global Ratings-adjusted funds from operations (FFO) to debt to 17.6% at the end of July 2017 from 12.5% at the end of July 2016 on a rolling 12-month basis. The change was mainly due to operational improvements, with a 1.1 percentage-point increase in its adjusted EBITDA margin to 16.2% at the end of July 2017.

According to our base case, SAS will achieve a ratio of adjusted FFO to debt of about 20% in fiscal 2018 (ending Oct. 31) mainly due to sustained EBITDA generation and additional reduction in adjusted debt.

SAS' business profile continues to reflect the company's exposure to the cyclical, fragmented, and highly capital-intensive European airline industry; and its higher cost position compared with peers. Management's focus is on improving the company's competitive position, as evident from its cost-saving plan. Its well-known brand and high market share among its target customer group in Scandinavia partly offset its higher cost positon.

SAS' financial risk profile continues to be constrained by high levels of adjusted debt (including operating leases and the preference shares we treat as debt) as well as its volatile earnings and cash flow generation. Although volatility in fuel prices and currency rates is somewhat mitigated by an internal hedging program, earnings can swing markedly from year to year.

We still consider SAS as a government-related entity although ownership by the Swedish, Norwegian, and Danish states declined to 38.9% following the latest issuance of common shares, from 42.9%, as only Denmark participated in the equity increase. However, the ownership has no effect on the rating as we think that there is a low likelihood of extraordinary support from these states in the event of financial distress.

The stable outlook reflects our expectations that the company will be able to sustain its improved credit measures consistent with a 'B+' rating, such as adjusted FFO to debt maintained between 16% and 25%, and that the gains from the ongoing efficiency program will preserve its competitive position and profitability.

We could consider an upgrade if SAS further improves its financial risk profile to such an extent that it demonstrated ample headroom within the significant category. We would view a ratio of adjusted FFO to debt of at least 25% on a sustainable basis as commensurate with a higher rating.

We could lower the rating if SAS' operating performance deteriorated unexpectedly and significantly from the current levels, for example, if we expected the company to report negative earnings for fiscal 2018, and this, in turn, led to deteriorating credit metrics. We would view a ratio of adjusted FFO to debt of less than 16% as commensurate with a lower rating. Such a deterioration could stem from prolonged higher oil prices of above $75 per barrel, which SAS was not able to offset with efficiency measures or higher ticket prices.


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