Norwegian Air Shuttle

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1 Transport Credit Insight Norway 21 October 2016 Please note: the statement at the rear of this report contains details of investment banking services recently provided by SEB which could be considered relevant to the subject matter of this report. Corporate rating: Public ratings Moody s: S&P: Fitch: B/Stable N.R. N.R. N.R. Market cap (NOKm) 10,931 Relative value, transportation bonds 800 WestAt NAS EUR NAS06 COLG12 NAS05 COLG10PRO TLG FINNAIR EUR LUFTH EUR and Bloomberg Spread development, NAS bonds Source: Bloomberg, SEB Icelandair USD Oct-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 NAS04 NAS05 NAS06 EUR 2019 bond Focus on long haul and getting the cost down More diversified passenger base as growth outside Scandinavia is high Norwegian reported a strong Q report that exceeded our expectations, helped by lower costs than anticipated. The guidance for 2016 remained unchanged, while for 2017, the company now guides for a unit cost range of NOK , which represents a small upside to our current estimate of NOK We also note the strong passenger growth of 12% to 8.6 million passengers during Q3, where Spain is experiencing the strongest growth (now the largest market outside Norway for the company). In terms of overall credit profile, we note small improvements overall, but no significant changes that change our overall credit view (maintain our shadow rating view of B/Stable). We continue to stress the importance of securing financing for the fleet expansion. Following the successful EETC financing earlier this year and the EUR 60m tap in its unsecured 2019 bond announced in Q3, we take comfort in a financing plan on track, but expect also other financing alternatives. We prefer the EUR bonds Although the report today was credit positive, we do not believe it should have any material impact on the pricing on the bonds. We have all the outstanding bonds at Marketweight, but highlight later in this report that we find best value in the EUR bond at the moment. This bond is currently indicated at Z+578bp at the moment, and if swapped to NOK, it would indicate a relatively steep NOK NAS curve that we find attractive, with a spread of around +626bps. Delivering on the cost side The adjusted Q3 EBITDA of NOK 1,933m was 10% above our NOK 1,751m estimate, driven by lower crew cost and technical maintenance than expected. Free cash flow was negative as expected at NOK 2.1bn, where operating cash flow came in at NOK -390m, while investments in the quarter totalled NOK 1.7bn. In total, Norwegian now holds NOK 2.2bn in cash, while the book equity ratio increased to 10% from 8% during Q3 (the market adjusted ratio is said to be around 16%). Although the debt level increased during the quarter to NOK 18.7bn, net unadjusted leverage declined from 6.9x to 6.3x helped by better profitability (adjusting for operating leases, we see the leverage ratio above 9x). With respect to other interesting statistics in the Q3 report, we note on the negative side that punctuality was down 6p.p. to 74%, while positively we saw the load factor increase to 91% (+0.6p.p). Analyst Henrik Blymke (47) henrik.blymke@seb.no Key credit metrics & ratios E 2017E 2018E Revenues (NOKm) 12,859 15,580 19,534 22,491 26,153 32,577 38,359 EBITDA (NOKm) , ,481 2,601 3,884 5,306 EBITDA margin 6.1% 9.6% -3.4% 6.6% 9.9% 11.9% 13.8% FOCF (NOKm) -1, ,096-3,633-4,613-11,717-12,730 Adjusted EBITDA net int. cover. (x) Adjusted net debt to EBITDA (x) Adjusted FFO / Net debt 12% 16% 0% 4% 6% 8% 8% The estimates in this research report have been produced in collaboration with SEB equity research analysts Important. All disclosure information can be found on pages 6 7 of this document

2 Credit strengths One of the lowest unit cost levels in the industry. Young and modern fleet and with strong asset values in the ordered aircraft provide good access to funding sources. Strong market share in its domestic markets and increasing share internationally through its point-to-point network Credit concerns Extensive expansion plans which will put severe pressure on its balance sheet and credit metrics. Extraordinary costs and problems with its ramp up of long-haul operations. Exposed to the high business risk through its cyclical, competitive and high capital requirements in the industry.. Highly exposed to fuel price volatility and changes in FX. Selected outstanding bonds Issuer Bond rating Sector Issue date Maturity date Coupon Outst. Amount Rank Ind. price Ind. spread Recommendation As Airlines 03/07/ /07/2017 Nibor NOK 1000m Sr Unsecured Marketweight As Airlines 21/11/ /11/2017 Nibor + NOK 225m 1St Lien Marketweight As Airlines 20/05/ /05/2018 Nibor NOK 1250m Sr Unsecured Marketweight As Airlines 11/12/ /12/ % EUR 185m Sr Unsecured Marketweight Norwegian Air 16-1 B Ptt Ba3 Airlines 18/05/ /11/ % USD 74.81m Secured Norwegian Air 16-1 B Ptt Ba3 Airlines 18/05/ /11/ % USD 74.81m Secured Norwegian Air 16-1 A Ptt Baa3 Airlines 18/05/ /05/ % USD m Secured Norwegian Air 16-1 A Ptt Baa3 Airlines 18/05/ /05/ % USD m Secured Financial covenants : Dividend restrictions max 35% of net profit, Minimum book equity NOK 1.5bn, Minimum liquidity NOK m Source: Bloomberg and SEB Share price NAS, NOK per share Apr-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Fleet assumption and unit costs NAS NO Equity and Bloomberg Financial statement summary - Adjusted numbers (NOKm) Income statement E 2017E Revenues 19,534 22,491 26,153 32,577 EBITDA ,589 4,851 6,384 Net income (reported) -1, ,277 Cash flow statement E 2017E Funds from operations (FFO) ,627 3,209 4,643 Operating Cash Flow ,961 4,046 6,856 Free Operating cash flow -4,031-2,228-3,113-10,050 Pre-financing cash flow -3,974-2,228-3,189-10,050 Revenues and EBITDA margin (NOKm) (%) 50, , , , , E 2017E 2018E Total revenues EBITDA margin Balance sheet E 2017E Adjusted net debt / EBITDA Cash (and equivalents) 2,011 2,322 1,845 1,845 (x) Total debt 26,554 46,944 51,440 63, Net debt 24,543 44,622 49,595 61,312 Equity 2,128 2,367 3,108 4,385 Total assets (reported) 22,630 28,339 34,752 51, Key credit metrics & ratios E 2017E Net debt to EBITDA (x) Net debt to capital 92% 95% 94% 93% FFO / Net debt 0% 4% 6% 8% Equity ratio 9% 8% 9% 9% and financial reports E 2017E 2018E and financial reports SEB Credit Research 21 October

3 NAS EUR bond vs Moody s 4yr B3 rated index Oct-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 B3, 4yr EUR bond Relative value, peers and recommendation In this section, we give some more detail to our Marketweight recommendation presented on the first page. In short, we see that NAS is priced slightly above peers or index, which we argue is fair both in EUR and NOK. For the EUR bond, we highlight the excess spread premium is driven mainly by the non-rated status, while the NOK bond difference is driven more by a weaker financial risk profile than relevant transportations peers. Covenant structure and liquidity is deemed by us to have less impact on the pricing, while the positive effect from a lower fuel price environment is slightly positive for the overall industry, but expected to be offset to some degree by lower ticket prices. Recent performance versus market or peers NAS06 NOK bond vs NOK transportation peer, COLG 800 Jan-16 Mar-16 Apr-16 Jun-16 Aug-16 COLG10PRO NAS06 Looking at the EUR bond spread performance against the Moody s B3 index, we see that the NAS spread tightening has not seen as steep as the general market for relevant rating bracket. In our view, this makes sense and is fair given the fact that NAS bond is not rated, while the index includes more liquid rated issuers. Looking at the development in the NAS06 NOK bond, we compare it to another transportation bond, due to lacking of relevant B- index in the Norwegian market. We see some of the same development here, i.e. the NAS bond has not tightened as much as COLG, which also is helped by lower fuel prices at the moment. Also here, we believe the spread difference is fair given the fact that COLG is a better credit, which should be priced at a tighter spread curve. The NAS bonds versus current credit curves today NAS bond versus EUR airline peers and Moody s B- spread index NAS NOK bonds versus NOK transportation peers NAS07 NAS EETC FINNAIR EUR LUFTH EUR Ryanair Icelandair USD Easyjet Ryanair NAS06 COLG12 NAS05 COLG10PRO TLG As seen in the above graph to the left, NAS is priced much wider than its European airline peers based on its weaker rating / credit profile. The most similar credit risk peer continues to be SAS, which normally has had a spread curve slightly above NAS. Currently, SAS only has a SEK bond outstanding which could be called, which makes the spread comparison with this bond not so relevant at the moment. SEB Credit Research 21 October

4 Looking at the B- spread curve index as a better proxy for the NAS EUR bond pricing, we see that it looks slightly attractive at first glance. However, we believe that the 50+bps pickup one gets is correct, given that NAS is a non-rated paper and has a huge financing need, which makes the investor well aware that new supply is likely. Covenants in the bond loans are not really a key issue for the pricing we think The outstanding unsecured bonds (with a shadow rating one notch below the corporate rating) have the following financial covenants: Dividend restrictions (maximum 35% of net profit), Minimum book equity of NOK 1.5bn, and Minimum liquidity of NOK m. In addition, we note that the first lien secured bond (NAS05, maturing November 2017) has security in a property airline hangar, and has a shadow bond rating that is one notch above the corporate rating. Credit risk profile and peer comparison In order to get some more comparisons between some of the different European airlines, we present a table below. In short, we would summaries NAS as a highly leverage company, but with a healthy cost structure. It is currently the fastest growing company among the below peers and compared to its main competitor in the Scandinavian market, SAS, it has the ability to handle the yield pressure much better as its unit costs are much lower. Aviation Peers in USD millions, LTM or FY 15 figures NAS SAS Icelandair Finnair Lufthansa Ryanair Market Cap 1, , ,793 17,487 Revenues 2,759 4, ,551 35,192 7,175 EBITDAR ,819 2,198 Net Income ,864 1,712 Total Debt 2,404 1, ,126 4,417 Total Assets 3,882 3, ,251 35,637 12,316 EBITDA margin 6.6% 9.1% 23.3% 9.1% 10.7% 28.9% Equity ratio 8.8% 3.0% 35.5% 35.2% 13.3% 31.8% Capex/Sales 23.0% 10.3% 19.6% 15.2% 7.7% 18.6% Net Debt/EBITDA neg. neg 0.74 neg. Fuel % of op. cost Official(shadow) rating (B/Stable) B2/St, B/St n/a n/a Ba1/P,BBB-/N BBB+/Stable Passangers mill XX Fleet Size Source: Bloomberg Several years with negative free cash flow, but financing options are available Cash flow In order to fund the gap, we note that the company could use more sale-lease backs, clean aircraft sale, divest Bank Norwegian, spin-off its leasing business and issue equity. SEB Credit Research 21 October

5 Profit & loss statement (NOKm) E 2017E 2018E Total revenues 2,941 4,226 6,226 7,309 8,598 10,532 12,859 15,580 19,534 22,491 26,153 32,577 38,359 Total expenses -2,921-4,018-6,435-6,588-8,201-9,822-12,070-14,080-20,199-21,010-23,552-28,694-33,053 EBITDA , ,481 2,601 3,884 5,306 Depreciation ,133-1,299-1,796-2,444 Intangibles amortisation EBIT , ,303 2,088 2,862 Associated companies Net interest expenses Value changes Other financial items Reported pre-tax profit , ,672 2,313 Minority interests Total taxes Net profit , ,277 1,785 EBITDA margin (3.3) (3.4) EBIT margin (%) (1.0) 3.2 (5.4) (7.2) Tax rate (%) (228.1) Growth rates y-o-y (%) Total revenues EBITDA n.a (.1) (45.0) (144.3) EBIT (63.3) 98.1 (3.0) Pre-tax profit (95.3) 11,563.5 (61.0) (31.5) (29.8) , Cash flow (NOKm) E 2017E 2018E FFO ,537-1, ,709 2,977 3,997 Changes in working capital , ,048 1, , Operating cash flow ,727 1, ,556 2,546 5,190 4,560 Net capital expenditures ,229-1,820-2,189-2,766-2,046-4,989-5,189-7,159-16,907-17,290 Free operating cash flow ,151-1,755-1, ,096-3,633-4,613-11,717-12,730 Dividend paid Acquisitions, divestments net Pre-financing cash flow ,195-1,755-1, ,038-3,633-4,689-11,717-12,730 Net loan proceeds ,661 1, ,873 3,944 4,213 11,716 12,724 Share issue Other Net change in cash Capex/sales (%) Balance sheet (NOKm) E 2017E 2018E Cash and liquid assets ,408 1,178 1,105 1,731 2,166 2,011 2,322 1,845 1,845 1,839 Other current assets ,397 1,176 1,746 2,256 2,657 3,104 4,258 4,551 Long-term financial assets Fixed tangible assets ,264 2,447 4,162 6,069 8,517 10,151 16,986 21,983 28,350 43,797 59,207 Intangibles Total assets 1,062 2,331 3,179 5,022 6,621 9,004 11,920 14,760 22,630 28,339 34,752 51,353 67,050 Interest bearing debt ,583 2,485 4,250 5,527 6,512 13,284 17,228 21,440 33,156 45,880 Other liabilities 801 1,351 1,583 1,837 2,321 2,808 3,972 5,501 7,218 8,745 10,204 13,811 15,000 Minority interests Shareholders' equity ,602 1,814 1,946 2,421 2,747 2,128 2,367 3,108 4,385 6,170 Total liabilities and equity 1,062 2,331 3,179 5,022 6,621 9,004 11,920 14,760 22,630 28,339 34,752 51,353 67,050 Net debt (m) ,307 3,145 3,796 4,346 11,273 14,906 19,595 31,312 44,041 Net debt/equity (%) (88.9) (6.0) Equity/total assets (%) Net debt/ebitda (x) (11.3) (0.1) (0.4) (17.0) EBITDA Interest cover (21.1) (3.0) Main shareholders Management Company information Name (%) Votes Capital Title Name Contact Bjørn Kjos / HBK Invest COB Bjørn Kise Internet Folketrydgfondet CEO Bjørn Kjos Phone number (47) Skagen Vekst CFO Frode Foss Company description: (NAS) is the second largest airline in Scandinavia and the third largest low cost carrier in Europe. It is also the fastest growing airline in Europe, doubling its fleet to 100 aircraft in the past five years and with over 260 aircraft to be delivered by With a fuel efficient fleet, lean operations and expansion throughout Europe, Norwegian's unit costs are amongst the lowest in Europe. Unit costs should continue to fall as the European expansion progresses. In mid-2013, Norwegian established its low cost long haul venture which provides services to five US destinations and Bangkok from five European cities. This pioneering venture has been put into effect with the 787 Dreamliner aircraft alongside Norwegian's existing short haul network, resulting in unit costs 40-50% lower than competitors'. Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 21 October

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