OREANDA-NEWS. S&P Global Ratings today revised its outlook on Spain-based Amadeus IT Holding (Amadeus) to positive from stable. At the same time, we affirmed our 'BBB' long-term and 'A-2' short-term corporate credit ratings on Amadeus. We also affirmed our issue ratings on the group's debt.

The outlook revision reflects that Amadeus' metrics for financial year 2015 are stronger than we previously anticipated, and that the group has consistently posted healthy operating performances in the past few years. In addition, we believe that Amadeus' recent acquisition of travel technology company Navitaire LLC will strengthen its business risk profile by allowing the group to expand into the low-cost-carrier (LCC) and hybrid markets, under the IT solutions segment. We also anticipate that Navitaire will provide Amadeus integration opportunities for both its Altea and New Skies customers, as well as further geographically diversify in the Americas. We expect Amadeus to continue generating solid earnings and free cash flow over 2016-2018.

Our assessment of Amadeus' business risk profile as satisfactory takes into account the group's solid market position as an IT service provider to the global travel industry, with leading positions in Europe and several emerging markets. Importantly, Amadeus' operating profitability, measured by EBITDA, demonstrates relatively low volatility, and its margins are notably above that of main peers Sabre Holding and Travelport. In addition, the group benefits from high barriers to entry in global travel distribution systems and IT services, which operate under medium - to long-term contracts. Our business risk profile assessment also incorporates our view of the travel industry's intermediate risk and intermediate country risk, with about 40% of revenues generated in Western Europe, 18% in Asia-Pacific, 17% in North America, 12% in Middle East and Central Europe, and the remaining in Latin America and Southern Europe.

Amadeus' modest financial risk profile, in our view, reflects its ability to consistently generate solid free operating cash flow, tempered by relatively high dividend distribution. Our expectation that Amadeus will maintain its EBITDA margins is based on its sound track record of successfully integrating acquisitions and capitalizing on efficiency gains.

As of Dec. 31, 2015, adjusted debt to EBITDA was 1.6x (excluding Navitaire), funds from operations (FFO) to debt of 45%, and free operating cash flow (FOCF) to debt of 37%. We expect these ratios to deteriorate slightly in 2016, pro forma for the recent Navitaire acquisition, but they should rebound in 2017 to the aforementioned 2015 levels. We remain cautious, however, because the group could use its financial flexibility to pursue additional acquisitions or make additional returns to shareholders versus what we assume in our base case, which could result in somewhat weaker debt metrics.

We anticipate that strong profitability, a relative flexible operating structure, and favorable working capital traits will enable Amadeus to continue generating solid cash flows over 2016-2018.

In our base-case operating scenario for Amadeus, we assume: Revenue growth of about 7%-9% in 2016 and 5%-7% in 2017, pro-forma for Navitaire, supported by continued volume growth and market-share gains in the group's GDS segment and strong double-digit growth in its IT solutions segment. Annual capital expenditures (capex) of about 12%-14% of revenues. A dividend payout of about 50% of net income, at the higher end of the group's public guidance. Bolt-on acquisitions of about €150 million annually. Based on these assumptions, we arrive at the following credit measures, as adjusted by S&P Global Ratings: EBITDA margins remaining at about 30% in both 2016 and 2017, absent any unforeseen foreign exchange impact. Debt to EBITDA of 1.9x in 2016 and 1.6x in 2017.FFO to debt of 38% in 2016 and 43% in 2017.FOCF to debt of 30% in 2016 and 35% in 2017.

We apply a one-notch negative financial policy modifier. This reflects our belief that the group's debt-financed acquisitions and returns to shareholders could increase the current leverage profile from the stated 1.0x-1.5x target, excluding our adjustments.

We assess Amadeus' management and governance as strong. This mainly reflects our view of the group's sound track record in planning, strategy, and execution, as well as the experience of its broad management team.

The positive outlook reflects our view of at least a one-in-three likelihood that we could raise the ratings over the next 12-24 months if the company maintains low debt alongside a conservative financial policy in terms of shareholders' remunerations and leveraged acquisitions.

An upgrade would hinge on Amadeus' ability to achieve FFO to debt above 45%, with debt to EBITDA remaining below 2.0x and FOCF to debt above 25%, while maintaining favorable acquisitions appetite and shareholders' remuneration. We would also look for continued organic growth, stable or slightly improving profitability, and the smooth integration of newly acquired companies.

We could revise the outlook to stable or lower the ratings on Amadeus if weaker-than-anticipated operating performance or larger-than-expected acquisitions or shareholder returns resulted in adjusted debt to EBITDA of more than 3x, or adjusted FOCF to debt of less than 15% for a sustained period.