Rating rationale

Scope Ratings today assigns Falkensteiner Michaeler Tourism Group AG a B issuer rating with a Stable Outlook.

The issuer credit rating of B mainly reflects FMTG’s relatively small absolute size, its comparatively undiversified corporate structure, its highly leveraged balance sheet – although with an improving trend over recent years, as well as Scope’s view of the operational and project-related risks in the real estate division with regard to new hotel openings. The rating also reflects the company’s formerly tight liquidity situation, and Scope's understanding that the company’s recourse to continuous roll-over of uncommitted short-term bank lines will be possible in the future.

The rating is supported by FMTG’s positive track record with regard to sales growth, as well as by its comparatively high operating margins in a peer context. It is also supported by Scope's belief that the tourism industry has relatively little cyclical exposure and is protected, in Scope's view, by a medium risk regarding barriers to entry. FMTG is likely to have realised more than 25% of revenue growth in 2016, due to better capacity utilisation and the opening of new facilities. While this – in combination with substantial divestiture proceeds – has also translated into higher profits and FMTG reaching positive free cash flow status, debt is likely to increase in the current year due to heavy investments in Croatian hotel projects.

Scope notes FMTG’s relatively high exposure to short-term credit lines of about EUR 35m annually, consisting predominantly of short-term project-finance debt secured by real estate. While this exposure is largely uncovered by corporate liquidity and, most notably, there is an absence of committed credit lines, Scope notes that committed lines are hardly used in Austria, and expect the real estate security on the short-term debt to keep FMTG from suffering a liquidity crisis in case the short-term bank lines would not be prolonged. Scope expects FMTG to at least maintain its comparatively high EBITDAR margin and to return to free cash generation in 2018.

Positive key rating drivers

• Credit-supportive underlying tourism industry
• Positive track record with regard to revenue growth
• Comparatively high operating margins

Negative key rating drivers

• Small absolute size
• Highly leveraged balance sheet
• Real estate project risk

Outlook

The Outlook is Stable and reflects Scope’s expectation that FMTG can at least maintain its level of profitability and will be able to roll over the sizeable short-term credit lines on a yearly basis. The rating reflects Scope's expectation of an EBITDA interest cover of 2x or higher. A higher rating could result if the company progressed in realising projected sales and cash flow growth in the coming two years, and if the EBITDA interest cover reached above 3x, on a sustainable basis. A negative rating action could result from liquidity problems, generated by either lower future revenue generation or a non-prolongation of existing short-term debt maturities. It could also be triggered by the EBITDA interest ratio falling below 2x on a sustained basis.

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Regulatory disclosures

Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Torsten Hinrichs, Dr Stefan Bund, Dr Sven Janssen.
Rating prepared by Olaf Toelke, Lead Analyst
Responsible for approving all rating actions: Werner Stäblein, Executive Director

The rating concerns an entity, which was evaluated for the first time by Scope Ratings AG.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity. The issuer has participated in the rating process.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Annual reports/semi-annual reports of the rated entity - Website of the rated entity - Detailed information provided on request - Data provided by external data providers - Interview with the rated entity - External market reports - Press reports/other public information

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.
Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.
 
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Rating issued by
Scope Ratings AG, Lennéstraße 5, 10785 Berlin