TRANSPORTATION: Lufthansa (LHAGR; Baa3/BBB-/BBB-) we now see rating risk
Here is the exact quote (bbg); "We’ll likely report strong traffic figures, but unfortunately the gap between the positive developments of the whole group and those of Lufthansa Airlines and City Airlines has widened" (press briefing, Frankfurt).
We have always be concerned for secondary levels that trade flat to better peer IAG (likely supported by 1k denoms/German retail) but we are now getting concerned for ratings. S&P/Moody's will be reluctant to reverse across IG/HY in such short time after upgrades BUT Lufty will move outside thresholds this year and miss their expectations by some distance.
This was Moody's when it lifted it into IG in Jan; "Lufthansa's profits and operating cash flow will continue to strengthen in the next 12 months on the back of strong demand and tight cost control" while S&P when it moved to IG in Dec saw "flat-to-moderately higher adj. EBITDA in 2024" vs. 2023 levels of €4.8-4.9b (Lufty reported €4.9b). S&P goes on to note aircraft deliveries in years ahead would limit deleveraging ability and "current rating level hinges largely on the lasting strength of EBITDA and operating cash flows, in line with our 2024-2025 base case."
Midpoint of guidance now is for operating profit to be -41%yoy and FCF to be down over -46%. We see gross/net leverage at 2.8x/2.4x to end last year moving to 3.5x/3.1x on FY guidance and current debt load. Moody's saw gross leverage a tad higher at 3.1x in September and saw that moving lower with rating downgrades on sustained levels above 3x. S&P - in addition to the flat earnings expectations - had downgrade risk on EBITDA margins falling below 13% - consensus sees it closer to 10% this year.
Re. the driver of weakness which is coming from the flagship airline, it blamed delivery delays on new planes in Q2 and is continuing to do so. It is a relatively universal excuse for poor margin performance (less cargo capacity, higher maintenance costs, trained pilots for new models waiting around and biggest difference; fuel efficiency).
Unless it gives its 3rd profit warning for this year, scheduled 3Q results come on the 30th of Oct. We encourage caution on the curve that is trading at Baa2/Baa3 levels heading into it.