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 TLG01 100 FINNAIR EUR LUFTH EUR 0 1 2 3 4 5 6 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 Q3 2016 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 0.38-0.39, which represents a small upside to our current estimate of NOK 0.39. 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) 2282 7191 henrik.blymke@seb.no Key credit metrics & ratios 2012 2013 2014 2015 2016E 2017E 2018E Revenues (NOKm) 12,859 15,580 19,534 22,491 26,153 32,577 38,359 EBITDA (NOKm) 788.7 1,499-664.7 1,481 2,601 3,884 5,306 EBITDA margin 6.1% 9.6% -3.4% 6.6% 9.9% 11.9% 13.8% FOCF (NOKm) -1,038-112.9-5,096-3,633-4,613-11,717-12,730 Adjusted EBITDA net int. cover. (x) 11.7 5.8 1.3 3.7 3.8 4.4 4.6 Adjusted net debt to EBITDA (x) 4.8 5.5 26.3 12.4 10.2 9.6 9.2 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 www.seb.se Important. All disclosure information can be found on pages 6 7 of this document
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 03/07/2014 03/07/2017 Nibor + 375 NOK 1000m Sr Unsecured 100.4 317 Marketweight As Airlines 21/11/2014 21/11/2017 Nibor + NOK 225m 1St Lien 100.4 360 Marketweight As Airlines 20/05/2015 20/05/2018 Nibor + 575 NOK 1250m Sr Unsecured 102.4 422 Marketweight As Airlines 11/12/2015 11/12/2019 7.250% EUR 185m Sr Unsecured 105.1 572 Marketweight Norwegian Air 16-1 B Ptt Ba3 Airlines 18/05/2016 10/11/2023 7.% USD 74.81m Secured Norwegian Air 16-1 B Ptt Ba3 Airlines 18/05/2016 10/11/2023 7.% USD 74.81m Secured Norwegian Air 16-1 A Ptt Baa3 Airlines 18/05/2016 10/05/2028 4.875% USD 274.315m Secured Norwegian Air 16-1 A Ptt Baa3 Airlines 18/05/2016 10/05/2028 4.875% USD 274.315m 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 350 250 150 100 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 2014 2015 2016E 2017E Revenues 19,534 22,491 26,153 32,577 EBITDA 932.2 3,589 4,851 6,384 Net income (reported) -1,051 238.7 741.1 1,277 Cash flow statement 2014 2015 2016E 2017E Funds from operations (FFO) -90.2 1,627 3,209 4,643 Operating Cash Flow 957.5 2,961 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) (%) 50,000 25 40,000 20 30,000 15 20,000 10 10,000 5 0 0 2013 2014 2015 2016E 2017E 2018E Total revenues EBITDA margin Balance sheet 2014 2015 2016E 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 63,156 30.0 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 51,353 20.0 Key credit metrics & ratios 2014 2015 2016E 2017E Net debt to EBITDA (x) 26.3 12.4 10.2 9.6 Net debt to capital 92% 95% 94% 93% FFO / Net debt 0% 4% 6% 8% Equity ratio 9% 8% 9% 9% and financial reports 10.0 0.0 2013 2014 2015 2016E 2017E 2018E and financial reports SEB Credit Research 21 October 2016 2
NAS EUR bond vs Moody s 4yr B3 rated index 900 800 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 100 0 FINNAIR EUR LUFTH EUR Ryanair Icelandair USD Easyjet Ryanair 1 2 3 4 5 6 7 8 NAS06 COLG12 NAS05 COLG10PRO TLG01 1 2 3 4 5 6 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 2016 3
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 1,329 587 1,081 622 5,793 17,487 Revenues 2,759 4,492 932 2,551 35,192 7,175 EBITDAR 453 704 240 342 3,819 2,198 Net Income 30 108 111 98 1,864 1,712 Total Debt 2,404 1,086 66 380 7,126 4,417 Total Assets 3,882 3,429 972 2,251 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 8.86 0.29 neg. neg 0.74 neg. Fuel % of op. cost 23.41 22.48 22.82 26.17 18.39 40.81 Official(shadow) rating (B/Stable) B2/St, B/St n/a n/a Ba1/P,BBB-/N BBB+/Stable Passangers mill. 25.8 28.1 XX 10 107.7 119 Fleet Size 114 157 45 48 615 353 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 2016 4
Profit & loss statement (NOKm) 6 7 8 9 2010 2011 2012 2013 2014 2015 2016E 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 21 208-208 721 397 710 789 1,499-665 1,481 2,601 3,884 5,306 Depreciation -51-74 -130-149 -187-294 -385-530 -747-1,133-1,299-1,796-2,444 Intangibles amortisation 0 0 0 0 0 0 0 0 0 0 0 0 0 EBIT -31 134-338 572 210 416 403 970-1,412 348 1,303 2,088 2,862 Associated companies 0 9-9 3 6 20 33 47 58 104 218 232 273 Net interest expenses 6 3 30 2 0-29 -68-64 -168-275 -537-628 -822 Value changes 0 0 0 0 0 0 0 0 0 0 0 0 0 Other financial items -7-33 322 46 26-240 254-515 -106-103 -39-19 0 Reported pre-tax profit -32 113 5 623 243 167 623 437-1,628 73 945 1,672 2,313 Minority interests 0 0 0 0 0 0 0 0 0 0 0 0 0 Total taxes 10-28 -1-177 -98-271 -167-119 577 166-204 -395-528 Net profit -22 85 4 446 145-104 457 319-1,051 239 741 1,277 1,785 EBITDA margin 0.7 4.9 (3.3) 9.9 4.6 6.7 6.1 9.6 (3.4) 6.6 9.9 11.9 13.8 EBIT margin (%) (1.0) 3.2 (5.4) 7.8 2.4 3.9 3.1 6.2 (7.2) 1.5 5.0 6.4 7.5 Tax rate (%) 30.5 25.1 26.1 28.4 40.2 162.6 26.7 27.1 35.5 (228.1) 21.5 23.6 22.8 Growth rates y-o-y (%) Total revenues 49.1 43.7 47.3 17.4 17.6 22.5 22.1 21.2 25.4 15.1 16.3 24.6 17.7 EBITDA n.a. 912.2 (.1) 446.1 (45.0) 79.0 11.1 90.1 (144.3) 322.8 75.7 49.3 36.6 EBIT 0.0 0.0 0.0 0.0 (63.3) 98.1 (3.0) 140.3 0.0 0.0 274.9 60.3 37.1 Pre-tax profit 0.0 0.0 (95.3) 11,563.5 (61.0) (31.5) 274.3 (29.8) 0.0 0.0 1,198.7 77.0 38.3 Cash flow (NOKm) 6 7 8 9 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E FFO 80 189-306 561 304 513 450 1,537-1,155 222 1,709 2,977 3,997 Changes in working capital -4 230-25 326 364-78 1,277 396 1,048 1,334 837 2,213 563 Operating cash flow 76 419-331 887 669 435 1,727 1,933-107 1,556 2,546 5,190 4,560 Net capital expenditures -245-533 -254-1,229-1,820-2,189-2,766-2,046-4,989-5,189-7,159-16,907-17,290 Free operating cash flow -169-113 -585-342 -1,151-1,755-1,038-113 -5,096-3,633-4,613-11,717-12,730 Dividend paid 0 0 0 0 0 0 0 0 0 0 0 0 0 Acquisitions, divestments net 0 0 0-71 -44 0 0-82 57 0-76 0 0 Pre-financing cash flow -169-113 -585-413 -1,195-1,755-1,038-195 -5,038-3,633-4,689-11,717-12,730 Net loan proceeds -1 380 287 964 952 1,661 1,646 630 4,873 3,944 4,213 11,716 12,724 Share issue 140 0 251 13 20 18 0 0 0 0 0 0 Other 0 3 4-1 -1 0 0 0 11 0 0 0 0 Net change in cash -30 269 106 801-230 -73 626 435-155 311-476 -1-6 Capex/sales (%) 8.3 12.6 4.1 16.8 21.2 20.8 21.5 13.1 25.5 23.1 27.4 51.9 45.1 Balance sheet (NOKm) 6 7 8 9 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash and liquid assets 232 501 608 1,408 1,178 1,105 1,731 2,166 2,011 2,322 1,845 1,845 1,839 Other current assets 463 761 967 894 952 1,397 1,176 1,746 2,256 2,657 3,104 4,258 4,551 Long-term financial assets 9 92 83 82 118 198 254 446 727 727 727 727 727 Fixed tangible assets 228 683 1,264 2,447 4,162 6,069 8,517 10,151 16,986 21,983 28,350 43,797 59,207 Intangibles 130 293 258 191 211 235 242 251 650 650 725 725 725 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 0 471 698 1,583 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 0 0 0 0 0 0 0 0 0 0 0 0 0 Shareholders' equity 261 508 897 1,602 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) -232-30 91 175 1,307 3,145 3,796 4,346 11,273 14,906 19,595 31,312 44,041 Net debt/equity (%) (88.9) (6.0) 10.1 10.9 72.0 161.7 156.8 158.2 529.7 629.7 630.4 714.1 713.8 Equity/total assets (%) 24.6 21.8 28.2 31.9 27.4 21.6 20.3 18.6 9.4 8.4 8.9 8.5 9.2 Net debt/ebitda (x) (11.3) (0.1) (0.4) 0.2 3.3 4.4 4.8 2.9 (17.0) 10.1 7.5 8.1 8.3 EBITDA Interest cover 33.7 10.9 (21.1) 34.3 9.9 10.1 6.6 11.5 (3.0) 4.2 4.5 6.0 6.3 Main shareholders Management Company information Name (%) Votes Capital Title Name Contact Bjørn Kjos / HBK Invest 25.0 25.0 COB Bjørn Kise Internet www.norwegian.no Folketrydgfondet 6.9 6.9 CEO Bjørn Kjos Phone number (47) 6759 0 Skagen Vekst 4.4 4.4 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 2022. 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 2016 5
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SEB uses the following recommendation system for CDS spreadsheets: Buy we expect the CDS to outperform the sector performance Neutral we take a neutral view on the CDS, and do not recommend either a buy or sell Sell we expect the CDS spreads to underperform the sector performance. Credit Watch Negative When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating but the likely outcome is a negative rating change. Credit Watch Positive - When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating but the likely outcome is a positive rating change. Credit Watch Developing When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating and the likely outcome is uncertain SEB also assigns credit ratings, definitions of which can be found on our website: https://taz.vv.sebank.se/cgi-bin/pts3/mc6/mb/research.nsf?opendatabase&login Methodology SEB s Credit Research assigns its credit rating to an issuer based on the assessment of an issuer s business risk profile as well as its financial risk profile. The business risk profile includes country risk, industry risk, competitive position, and profitability. The financial risk profile includes financial policies, accounting, cash flow adequacy, capital structure and liquidity. The outcome of the assessment of the two risk profiles is weighed together for a final overall rating. In addition to SEB s credit rating assessment, other factors considered in a particular issuer include the credit ratings assigned to a specific issuer by independent agencies, the value and market price of its securities, macroeconomic factors such as interest rates, promised coupon or yield of the specific instruments, and historical spread developments. Credit Research Distribution (as of 1 Jun 2016) A* B* Overweight 21.6% 9.4% Marketweight 69.2% 23.6% Underweight 9.2% 2.5% A* denotes recommendations for all companies covered B* denotes recommendation for companies to which SEB has provided investment banking services in the last 12 months. Recommendation History Instrument Recommendation Date NAS 11 Dec 2019 7.25% Marketweight 11 Feb 2016 NAS 20 May 2018 N+575 Marketweight 11 Feb 2016 NAS 21 Nov 2017 N+ Secured Marketweight 11 Feb 2016 NAS 3 Jul 2017 N+375 Marketweight 11 Feb 2016 Recommendation changes by SEB Credit Research Analysts in the subject company over the past 12 months. If no recommendation changes were made in that period, the most recent change is stated. SEB Credit Research 21 October 2016 7
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