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Fitch Takes Actions on Latin American Airlines

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Fitch Takes Actions on Latin American Airlines

Fitch Ratings has conducted a portfolio review of the Latin American airlines amid the current challenging scenario of the coronavirus pandemic, and the expected sharp drop in demand occurring in the markets due to travel bans, social distancing and slow economic activity. The international ratings of LATAM Airlines Group (LATAM), Azul S.A. (Azul), GOL Linhas Aereas Inteligentes S.A. (GOL) and Avianca Holdings (Avianca) have all been downgraded one or two notches. All of the ratings of these airlines have been placed on Rating Watch Negative (RWN).

RATING ACTIONS
ENTITY/DEBT RATING RECOVERY PRIOR
HIDE RATING ACTIONS
AZUL Investments LLP
senior unsecured
LT
B
Downgrade
RR4 BB-
GOL Linhas Aereas Inteligentes S.A.
LT IDR
B
Downgrade
B+
LC LT IDR
B
Downgrade
B+
Natl LT
BBB-(bra)
Downgrade
A-(bra)
Aerovias del Continente Americano S.A. (Avianca)
LT IDR
CCC-
Downgrade
CCC+
LC LT IDR
CCC-
Downgrade
CCC+
Gol Finance Inc.
senior unsecured
LT
B
Downgrade
RR4 B+
LATAM Airlines Group S.A.
LT IDR
B+
Downgrade
BB-
Natl LT
BBB(cl)
Downgrade
BBB+(cl)
Nat Equity Rating
Primera Clase Nivel 3(cl)
Affirmed
Primera Clase Nivel 3(cl)
senior unsecured
Natl LT
BBB(cl)
Downgrade
BBB+(cl)
Avianca Leasing LLC
senior unsecured
LT
CC
Downgrade
RR6 CCC-
Gol Finance
senior unsecured
LT
B
Downgrade
RR4 B+
Azul S.A.
LT IDR
B
Downgrade
BB-
LC LT IDR
B
Downgrade
BB-
Natl LT
BBB-(bra)
Downgrade
A+(bra)
Grupo TACA Holdings Limited
LT IDR
CCC-
Downgrade
CCC+
senior unsecured
LT
CC
Downgrade
RR6 CCC-
LATAM Finance Limited
senior unsecured
LT
B+
Downgrade
RR4 BB-
Avianca Holdings S.A.
LT IDR
CCC-
Downgrade
CCC+
LC LT IDR
CCC-
Downgrade
CCC+
senior unsecured
LT
CC
Downgrade
RR6 CCC-
senior secured
LT
CCC-
Downgrade
RR4 CCC+
GOL Linhas Aereas S.A.
LT IDR
B
Downgrade
B+
LC LT IDR
B
Downgrade
B+
Natl LT
BBB-(bra)
Downgrade
A-(bra)

KEY RATING DRIVERS

Strong Cash Flow Burn due to Coronavirus: The downgrades reflect increased credit risk as a result of the coronavirus pandemic that will lead to negative FCF, diminished liquidity positions and weaker balance sheets. The airlines have responded to the challenging environment with capacity reductions ranging from 30%-50% in domestic markets and up to 95% in international markets during the 2Q20. Capacity reductions in Brazil are projected to increase as the virus spreads and more restrictive measures are imposed that stifle demand. The downgrades take into account the expectation of a slow recovery period, as well as the sharp deterioration of local currencies and the mismatch between debt and lease obligations and revenues generated from domestic operations.

High Uncertainty Results in Rating Watch: The Rating Watch Negative that have been assigned to these issuers reflect the continued cash flow pressure these companies would face if the travel restrictions related to coronavirus continue for a prolonged period of time. LATAM, GOL, Azul and Avianca are trying to reduce fixed costs and find alternatives to minimize liquidity deterioration. Access to credit lines and/or effective government support is a key item to watch as it could potentially constitute some relief from liquidity pressure.

Rating Action Varies: LATAM has the strongest liquidity position among the four issuers and the most diverse sources of revenues. It is currently operating at less than 50% of its capacity. Its ratings were downgraded by one notch to 'B+' to reflect deterioration in its strong liquidity position during the next few months and diminished prospects of strong performance in the second half of 2020. The ratings of Azul and GOL have been equalized at 'B' to reflect their high exposure to the Brazilian market. Brazil's economy was starting to regain steam after a prolonged downturn and remains vulnerable to changing conditions and consumer sentiment given high unemployment levels and an uneven recovery. The timing and degree of support from the Brazilian government is hard to measure given its fiscal constraints. Avianca just recently completed a debt restructuring and its business and financial position remain fragile. Like LATAM, Avianca has high exposure to international travel. It was downgraded to 'CCC-' from 'CCC+' to reflect limited financial flexibility, tight credit metrics, and negative FCF.

RATING SENSITIVITIES

RATING SENSITIVITIES

The resolution of the RWN will depend on the severity of the impact on issuer's operating cash flow generation in 2Q20, issuer's ability to reduce fixed costs and the pressures on liquidity.

LATAM

Developments that May, Individually or Collectively, Lead to Negative Rating Action

-- Failure to preserve liquidity and refinance short term financial and leasing obligations.

-- Prospects of total adjusted debt/EBITDAR sustained above 5.5x and/or net adjusted debt/EBITDAR above 5.0 x by 2021.

AZUL

Developments that May, Individually or Collectively, Lead to Negative Rating Action

-- Failure to preserve liquidity and refinance short term financial and leasing obligations;

-- Prospects of total adjusted debt/EBITDAR sustained above 6.0x and/or net adjusted debt/EBITDAR above 5.0x by 2021.

GOL

Developments that May, Individually or Collectively, Lead to Negative Rating Action

-- Failure to preserve liquidity and refinance short term financial and leasing obligations;

-- Prospects of total adjusted debt/EBITDAR sustained above 6.0x and/or net adjusted debt/EBITDAR above 5.0x by 2021.

AVIANCA

Developments that May, Individually or Collectively, Lead to Negative Rating Action

-- Failure to preserve liquidity and refinance short term financial and leasing obligations.

-- Prospects of net adjusted debt/EBITDAR above 8.0x by 2021.

This press release was sourced from Fitch Ratings on 20-Mar-2020.