Fitch rates TAM's proposed notes 'BB-'

TAM's Foreign and Local currency Issuer Default Ratings (IDR) are currently 'BB-' and its National Scale Rating is 'A-(bra)'. The Rating Outlook is Negative for all of TAM's corporate ratings.

Strong Business Position Continue to Support Rating:

TAM's ratings continue to reflect the company's strong market presence in the domestic air passenger transportation sector. It also factors in the company's position as the sole Brazilian airline operator in long-haul route to Europe and USA, strengthened by several code-share agreements. Further factored in TAM's ratings is the high percentage of business passengers in its ticket sales mix and the profitability of this segment.

Strong Competition and Fuel Price Volatility Pressure Results:

The combination of intensified competition in the Brazilian market and a slowdown of its passenger flow growth have negatively impacted TAM's operating metrics such as load factors, yields and aircraft utilization in recent quarters. The second quarter historically represents the weakest results. TAM reported a negative spread between RASK-CASK of BRL 0.97 cents during the most recent quarter. This figure compares with positive figures of BRL1.12 cents during the first quarter of 2009 (1Q'09) and BRL 0.48 during 2Q'08. As a result, the company's EBITDAR margin decreased to 8.3% during 2Q'09 from 18.9% in 1Q'09 and 12.6% in 2Q'08. Fitch expects only a modest recovery of margins during the next six months.

Despite weak operating metrics, TAM's EBITDA was BRL 1.692 billion during the latest twelve months (LTM) ended June 30, 2009, an increase from BRL1.613 billion during 2008. The lower fuel expenses since second half of 2008 helped the company to offset the pressure on RASK. The EBITDAR margin for the LTM ended June 30, 2009 was 15.7% compared to 15.2% in 2008.

Derivatives Reduces Liquidity, Leverage Ratios are Rising:

TAM's liquidity position has been pressured in 2009 by the settlement of fuel hedge derivative contracts that totaled BRL1.2 billion at the end of 2008. In the first six months of 2009, total hedge disbursement reached BRL450 million. Fitch expects that TAM will incur expenses for these contracts of about USD50 million during the third quarter, assuming an average cost of the WTI barrel at USD68, and about USD45 million in the last quarter of 2009. An additional, USD200 million may be required to liquidate its hedging position through the first quarter of 2011. TAM had BRL1.1 billion of cash and marketable securities and BRL917 million of on balance sheet short-term debt as of June 30, 2009. Of TAM's cash balance, BRL240 million are restricted cash related to hedge contracts. The company's cash balance was enhanced during July 2009 when it issued BRL600 million of debentures.

Leverage is high and is likely to rise. As of June 30, 2009, the company's total adjusted debt to EBITDAR was 6.1 times (x), a decrease from 6.9x at Dec. 30, 2008, mostly related to the impact of the dollar's devaluation on debt. TAM had BRL6.8 billion of total debt as of June 30 2009, comprised mainly of aircraft leases and capital market operations. The company's total adjusted debt was BRL10.4 billion. This debt includes off balance sheet operating leases of BRL3.5 billion. About 93% of TAM's total adjusted debt was denominated in U.S. dollars or linked to the dollar. The company does not hedge the currency of its debt, partially mitigating it with the fact that about 35% of its revenues are tied to the dollar, but exposing results to fluctuations of the currency. Results during 2009 have been bolstered by the strengthening of the Brazilian Real, in contrast to very negative results during the second half of 2009. The recent debentures issuance combined with the current bond issuance will add around BRL1.1 billion in TAM's indebtedness, which should result in higher leverage.