Investing.com -- Moody’s Ratings has downgraded the Senior Secured First Lien Term Loan B (TLB) facility of Tripadvisor (NASDAQ: TRIP ), Inc. from Ba2 to Ba3, while changing the outlook from positive to stable. Other credit ratings of Tripadvisor, including the Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating (PDR), remain affirmed. The Speculative Grade Liquidity (SGL) rating also remains at SGL-1.

Tripadvisor is raising an additional $350 million in debt under its existing TLB facility. The proceeds are expected to be utilized for repaying its outstanding convertible notes due in 2026 and other corporate purposes. This issuance will initially increase gross leverage by approximately 1x. However, the leverage will remain credit neutral on a pro forma basis when the convertible notes are repaid. Due to the anticipation of a shift to a fully secured debt structure, the TLB facility will no longer benefit from junior debt claims, causing a one notch downgrade of the TLB, aligning it with the CFR.

Moody’s also expects the planned merger between Tripadvisor and Liberty TripAdvisor Holdings (OTC: LTRPA ), Inc. (the Parent) to be completed soon. The transaction will involve Tripadvisor purchasing the shares held by the Parent. The transaction will cost approximately $392 million in cash, which includes $20 million to common shareholders, $42.5 million plus around 3 million Tripadvisor common shares to holders of Parent’s Series A Preferred Stock, and $330 million for the redemption of Parent’s outstanding exchangeable debentures. Moody’s does not anticipate this transaction to significantly alter Tripadvisor’s robust liquidity profile.

The outlook was adjusted to stable due to lower projected profitability and free cash flows, partially due to higher borrowing costs from the TLB issuance and softer EBITDA margins. This is also due to the continued shift to its higher-growth but lower-margin segments and a compression in profitability at Brand Tripadvisor. This is under pressure due to a mix of the company’s investment in growth initiatives and revenue declines in legacy offerings related to structural changes in the hotel action funnel and deprioritization of certain other offerings.

The Brand Tripadvisor segment, which relies heavily on a pay-per-click revenue model, experienced an 8% revenue decline in 2024. This was a significant drop from the 7% growth reported in 2023. The segment is particularly vulnerable to emerging competitors, including generative artificial intelligence (GenAI) services. Moody’s expects further declines in this segment, which could accelerate, making it more challenging to offset with growth at Viator and TheFork.

Despite the pressures, Tripadvisor’s credit profile is supported by a history of very good liquidity and a disciplined financial policy. The company’s global brand strength and growing revenue diversity with a mix across geographies and increasing balance across three travel segments also contribute to its credit profile. The Viator brand, which provides travel experiences, is growing quickly and offers booking and payment services, unlike the pay-per-click revenue model of Brand Tripadvisor.

However, the credit profile is constrained by its relatively small scale (under $2 billion in revenue) and growing pressure on the large legacy segment, Brand Tripadvisor. Consolidated profitability has been falling, due in part to the mix shift to Viator and TheFork which are still smaller in scale and lack the benefit of operating leverage.

The stable outlook reflects Moody’s expectation that the Company will maintain very good liquidity and gross leverage in the mid 3x range following repayment of the convertible notes due 2026. Free cash flows should range between $90 to $110 million with FCF to debt between 7% to 12%.

Rating upgrades or downgrades could be considered based on several factors, including changes in leverage, consolidated revenue and EBITDA growth, profitability, free cash flow to debt, liquidity, scale, diversity, and market position.

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